Why Subaru owners are good 401(k) investors (column)

[fatabbot]

Driveby, thanks for your posts. I am a legal/compliance consultant that works with law firms and TPA's, and I really can't find any faults in your posts.

I was working with a new client a few months ago. He's owned his business for 40 years. We were talking about employee behavior. He said that out of over 300 separated employees who were participants in his 401(k) and DB plans that only 2 had ever actually rolled their account balance over instead of taking a cash distribution. Scary.

Where are we going to be in 20-30 years when SS is bankrupt and so many people have worked their whole lives without saving even a six figure sum in their retirement accounts?

I ran a spreadsheet last year comparing participant directed investing against trustee directed investment 401(k) plans (total sample size about 2000, 1/4 trustee directed, 3/4 PDI). PDI plans averaged about 5% less in gains in good years and had more than triple the losses in down years.

Something's not right, especially when the push is to automatic enrollment, participant directed plans.

[DonD]

Originally Posted by driveby

Not regulation, but education.

We will never regulate the exploitation of ignorance or laziness. I don't condone that exploitation, but I understand that it is, evolutionarily speaking, somewhat positive for our society.

BUT there is a better way. We can try to replace (financial) ignorance with knowledge, and we can attempt to motivate the (financially) lazy.

This is a very worthwhile goal IMO, because most of the evil in this world is paid for by "dumb money"...money that has been "contributed" to accounts that are invested for reasons so far removed, and so far abstracted, from our real-world priorities that it ends up hurting us in the long run. For example, the Wall Street system has forced American car manufacturers to design cars with a 5-10 year average lifespan, when they could easily build cars that last for 20-30 years. Winner: bankers & executives. Losers: millions of car owners, the environment, and finally the employees of the companies that build these crappy cars.

Americans who "contribute" to a 401(k) account typically do not play any active role in managing their "contributions". Yup, the payments into these accounts are called "contributions". You'd think that more folks would read the dictionary definition of "contribution" and catch the hint...but they don't.

I don't think this is uniquely American. It may be emphasized because the American banking system is particularly aggressive & pervasive & amoral. But...I know Australians with "superannuation" accounts who behave the same way. And I'd bet the situation is similar in other countries. The "middle class" is so busy making their money and raising their families that they leave their "contributions" to the "experts".

So most folks with 401(k) accounts buy into the simple programming that says they will make more money by deferring their taxes, and they abdicate their investment power to "funds" that have their own goals. The fund managers can then make risky bets and paper constructs with this pool of "dumb money", because they bear no risk. They will be paid if they lose, and they will be paid hugely if they win. (Actually it turns out, they will also be paid hugely if they lose. Witness the $700,000,000,000 TARP "bailout". Yes, those are 11 zeros behind the 7. It makes the BP oil spill look like a coffee spill.)

It's a terribly broken system. The best way to fix it, IMO, is for individuals to pierce the veil of financial programming, hold and invest their own money in businesses/resources that they personally endorse, and shun politicians who are funded by the banks. Pipe dream? Maybe. But I think this might actually happen in the next decade or so. The current system waaaay overextended and is now a huge house of cards. Mark my words, June 12, 2010.

OK, back to car talk.


-Jeff

Amen, you summed it up very well