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The New York Times weighed in the debate over 401 (k) plans this morning. There are a number of ideas that sound just peachy in the la-la land that the Editors must believe exists. But there’s little in the piece that helps advance feasible retirement solutions here in the real world.
The debate over 401 (k) reform has heated up in the aftermath of the financial crisis. Perhaps nowhere was pain felt more acutely and immediately than in 401 (k) accounts, which are down approximately 25% from the peak levels of 2007.
With retirement savings depleted, many participants are demoralized and scared. In an April report, AARP said that 30% of retirement plan participants have stopped contributing money into their accounts. Even Congress is getting into the act, suggesting that improved fee disclosure would improve the health of 401 (k) plans. Both lawmakers and the NYT are missing the point in addressing the American retirement problem.
The advent of 401(k)s saw a massive risk transfer from corporations to employees. But as pensions disappeared nobody said, “Hey, instead of your boss paying into a guaranteed retirement plan, the risk of making contributions and managing your retirement money is entirely on you.”
And until the bottom fell out of the market, ignorance was bliss. It helped that 401(k) plans took off at the beginning of a massive bull market. Even as markets hiccuped in 1987 and 1990, they rebounded within a year, masking the larger risks that participants were bearing and diminishing their respect for prudence.
A native Bulgarian always complains that "Americans are too optimistic!" I try to explain that some of that is part of the DNA here, while he likes to attribute the rosy outlook to a lack of struggle. To prove the point, he cites an old joke from his former country, which I like to call "The Bulgarian Optimist".
The Bulgarian Pessimist meets the Bulgarian Optimist on the street. The Pessimist says, "Things CAN’T get worse!", to which the Optimist says, "No, things CAN get worse!"
I thought about the Bulgarian Optimist when I read a recent research report from Fidelity Investments. The study examined how an investor’s outlook related to his or her retirement readiness. Were investors with a pessimistic outlook more conservative and better long-term planners? Or were investors with an optimistic outlook more aggressive and a bit more reckless when it comes to defining retirement goals?
Category | Change in Fees | Fees 7/30/2009 | Fees a Year Ago |
| U.S. Diversified | +.06 | 1.37% | 1.31% |
| Domestic Equity | +.05 | 1.39% | 1.34% |
| Int’l Equity | +.08 | 1.56% | 1.48% |
| Taxable Bond | +.01 | 1.04% | 1.03% |
| Municipal Bond | +.01 | 1.03% | 1.02% |
| Asset Allocation | -.03 | 1.30% | 1.33% |
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