Relevant and even prescient commentary on news, politics and the economy.

Draining 401k 2008-2013

My post in 2008  Draining 401k pool of money  came to mind  when I saw this Washington Post article in 2013…The trends have accelerated over the last four years, and as a general political and policy issue the lens is currently based on a pre-occupation with the federal budget deficits and austerity, the private side of savings appears to matter to people much less.

Fiscal trouble ahead for most future retirees:

For the first time since the New Deal, a majority of Americans are headed toward a retirement in which they will be financially worse off than their parents, jeopardizing a long era of improved living standards for the nation’s elderly, according to a growing consensus of new research.

The Great Recession and the weak recovery darkened the retirement picture for significant numbers of Americans. And the full extent of the damage is only now being grasped by experts and policymakers.

Kenneth Thomas’s 2013 posts on retirement savings 66 trillion retirement saving shortfall and Solutions to middle class retirements.

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Economics and Bosses

Peter Dorman at Econospeak, who is smarter and nicer than I am,* boils down the question:

[D]o you believe that managers normally make the right decisions over how to run organizations?

If you believe that premise, please explain:

  1. Why all those great managers of the late 1940s through the mid-1970s ran defined benefit contribution plans, but their successors—who supposedly are more capable—are only capable of offering defined contribution?
  2. That “underfunded pension benefits” are evil, but “overunded” pensions led to the LBO (now “Private Equity”) movement of the 1980s.
  3. That, in the 1980s, GM being $1B underfunded caused Congress to pass a bill allowing pensions to become fully funded over 20 years—and that most of those targets were missed?

If bosses are so good at managing “ongoing concerns,” why do they take their payments upfront? What does—and should—this tell us about discount rates?

*This is a fairly low standard, outside of people who work in finance.

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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.

as

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.

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