Blaming the Badly Allocated for Choices Not Necessarily Their Own

Tom’s working on explaining Savings 101, so this is specifically to deal with the “issue with” retirement accounts.

Via Lawrence G. Lux, we find the A.P. (and maybe the NYT) highlighting a “study” by an investment management firm that “discovers” problems with the way people manage their 401(k)s:

Some of the diversification problems stemmed from concentrated holdings of company stock. Experts urge savers to hold no more than 10 percent to 15 percent of their accounts in company stock, pointing out that they could sustain significant losses if the company runs into trouble or goes bankrupt.

The Financial Engines study found that among savers eligible to receive company stock, more than one-third had more than 20 percent of their holdings in the company’s shares. Some older workers had more than half their holdings in company stock, and workers with salaries under $25,000 also held a disproportionate amount of company stock, the study found.

On the level of savings, the study found that just 7 percent of 401(k) participants were saving the maximum allowed.

Much of that is common sense. (Think Enron: the time when your company stock will be least value to you also will be the time you may need to borrow against your retirement account.)

Some of it, likely, is the way the plans are offered. (Again, think Enron.) Public companies tend to offer their stock as part of a “retirement plan,” and many “investors” are told to invest in “what you know.”

However, the absurd claim in the lede of the AP piece (“Despite extensive efforts to educate workers about saving for retirement”) is belied by two realities. One is noted by Lux:

Look, Maw, those damned Kids don’t know how to manage their (401)k Funds. When are they going to learn that they have to spend 20 hrs. per Week evaluating good potential Investments. Listen to them complain that they don’t have the time–between raising children and working a 50-hour Workweek. (italics removed)

the other comes from anyone who knows a bit of history and remembers that pensions have been historically underfunded (or raided) by management. If trained money managers couldn’t do a good job in the Glory Days of Defined Benefit (and, make no mistake, a literal reading of economic theory would lead anyone to believe those were the glory days), then expecting people who do not specialize in managing money to allocate “appropriately” should be, on the face of it, absurd.

Finally, some of the problem likely is due to constraint optimization issues. (Short version: You can only save what you don’t have to spend.) Let us rewrite this paragraph:

Nearly two-thirds of those earning less than $25,000 a year don’t contribute enough to get the full company match, the study found. But 24 percent of those earning $50,000 to $75,000 a year and 12 percent of those earning more than $100,000 a year didn’t get the full match, either.


Only slgihtly more than one-third of those earning less than $25,000 a year have enough disposable income to get the full company match, the study found. Meanwhile, 76 percent of those earning $50,000 to $75,000 a year and 88 percent of those earning more than $100,000 a year were able to qualify for the full match.

But that makes it clear, as divorced one like Bush noted in a comment to vtcodger’s post:

You don’t invest in the market until you have money you can afford to lose.

And a lot more people making $50,000-plus-a-year have money they can afford to lose than those making less than $25,000 p.a. Which is what the data shows.