Taking Charge of Our 401(k) Investments

One thing that bothers me is the way individuals invest their 401(k) funds. I'm not blaming us as individuals for doing the wrong things, but I do believe it would be so much better for us if we understood the basics of investing with respect to cash, bonds and stocks. The sad fact is that too many of us don't.

Of course, we don't save enough. But leaving that aside, we don't invest what we do save properly. Unfortunately, that's important to our future economic security now and in a radically different way than it was thirty plus years ago.

In the "good old days" pension plans and guaranteed benefits were the norm. Employers had the responsibility to pay the promised monthly pension benefit regardless of how successful its pension fund investments were and how they were invested.

As we'll learn in future posts, investing success was easy then. But as interest rates fell over the past several decades, investing success involving a blend of bonds and stocks has become more difficult to achieve.

In the private sector, 401(k) plans have now largely replaced pension plans. In fact, while 62% of employees with retirement benefits were covered by pension plans in 1980, only 7% are today.

In my opinion, that's what's up ahead for public sector employees as well.

But let's not get too far ahead of the story. 10 things 401(k) plans won't tell you provides these basic facts:

"For more and more Americans, the quality of one’s retirement comes down to the quality of one’s 401(k).

That’s a lot of pressure to put on plans that started out as a source of extra cash for individuals who were already guaranteed a secure monthly retirement income. When 401(k)s were first introduced in the late 1970s, most workers still had “defined benefit” pensions — retirement plans where employers made all the decisions about what to invest where. Back then, 401(k)s were intended as mere supplements to those plans . . . .

The double-digit interest rates of the early 1980s made it relatively easy for companies to meet their obligations through low-risk bonds . . . but pensions became more expensive for companies as interest rates began to fall and plans had to project for even lower rates in the future. From then on, 401(k) plans, known in the industry as “defined contribution” plans — where the financial burden is placed squarely on the employee — continued to grow, as more companies decided that pensions were too pricey to continue.

Today, 401(k)s hold $3.5 trillion of retirement assets, and only 7% of private sector employees with retirement benefits had a pension in 2008, down exponentially from 62% in 1980."

SUMMING UP

During the past 30 plus years, individuals employed in the private sector have become responsible for making their own saving and investing decisions which will enable them to have a financially secure retirement.

Unfortunately, however, since nobody bothered to teach people the basics of investing, we now have lots of problems due to not enough retirement funds. And this is the case for both private and public sector employees.

In the private sector, employees haven't socked away enough on their own. And that which they have saved, they in large measure haven't invested wisely.

To repeat, this investing illiteracy isn't their fault and people are by no means stupid. They just don't know what to do about saving and investing for their retirement years and how to do it --- yet.

In the public sector, promises for pension benefits have been made by government but sufficient funds haven't been set aside and invested responsibly to meet these promises. There has been a great deal of investing illiteracy on the part of government officials here as well.

So we'll try to do our part, small as it may be, to help people gain a better understanding of achieving a sufficient level of financial and investing knowledge over time so that they may save and invest in a DIY and common sense based long term manner.

And that goes for young, middle age and oldsters alike. More to come.

Thanks. Bob.