Back in the 80s it became common for companies to phase out defined benefit pension plans in favor of 401K plans. It certainly seemed like a great thing all around – companies shed the onerous burden of the pension plan, and employees got the freedom to invest as they chose potentially unlocking much higher gains. It was a good theory, except that the current economic crisis is making people think twice about this. Much to my own surprise, I’m starting to question it too.
I’ve gone through quite an evolution on investing over the years. When I graduated from school, I had no concept of investing. Over the years by circumstance I heard this and that, did this and that. Finally I got serious. I started studying and learning. I also got better results. It’s been an ongoing process. I’ve recognized two arduous truths: First, you can’t succeed at investment without a paying a lot of attention to it. Second, it requires a lot of knowledge. I find the more I learn, and the more care I put into it, the better it works. Conversely, if I get busy at work for a while, and ignore the market too long, the market changes, and I lose out.
But all of this flies in the face of the 401k! First of all, most of people want to treat this like a bank account, where you make a deposit at an arbitrary time, proceed to ignore it, and then expect at some other arbitrary time some positive outcome. This kind of simple buy-and-hold approach is flawed though. It’s like driving on the freeway: excessive lane changes are unsafe, but missing your exit is no good either. Even when investing for the long term, you have to think about when you enter, when you exit and where you’re going. That requires time, knowledge and attention. This is hard for many people, they lack the education and knowledge to make good choices, and often don’t spend enough time on the topic either, the more so because they don’t realize how much time they should be putting into it. So for many people in the long run a 401k plan can be a road to disappointment or disaster. Now if the average investor can’t do a good job of it, what’s the alternative?
Obviously, one thing missing today is simple: nowhere in school are kids taught about economics and investing. Personal finance should be a required course in high school and in college. No one should be turned loose on the work force without a basic understanding of managing cash and investments. This would greatly help a lot of people do better in the market with their retirement plans. But what about current employees? Can employers also provide training in this area for those employees who need it, as part of the process for enrolling in retirement plans?
Certainly this isn’t an easy situation, but socially it will get worse before it gets better, as I suspect that many of the baby boomers as they retire will release that they saved far too little and their investments fall far short of their expectations. I’m not quite sure what the answer is, but we’re definitely going to hear a lot more about this in coming years!
tom
