So let's set the record straight since knowledge is power.
The portability of 401(k) plans, the real world funding with real world contributions by both employers and employees (instead of often empty and unfulfilled promises by plan sponsors), the absence of paying high fees to "expert" advisors by pension plans (for no value added to what the market will bring on its unmanaged own), and the fact that anything left over will go to our heirs, when added together make the clear, compelling and convincing case that 401(k) plans are superior.
And that's true regardless of what private and public sector union leaders and government officials have to say.
When investing our own money, aka MOM, we individuals have time on our side compared to the "experts," and that's the biggest advantage of all. We also care more, much more, about our personal economic well being and that of our families as well.
So now let's look closer at this '401(k) is better' investment theory 'heresy' I'm presenting for your full and fair consideration.
The Goals of Traders and Investors Are Light-Years Apart tells the 'time is on our side' story of individual investors well:
"The Goals of Traders and Investors Are Light-Years Apart
A firm specializing in nonpublic data collection and analysis hired a helicopter to fly over oil storage tanks. Using a heat-sensitive camera, the helicopter recorded tank levels. The goal? Get an early estimate of oil stocks on hand in the United States before the official numbers were released.
This kind of data is like catnip to traders who deal in oil, but it doesn’t come cheap. The oil report costs $90,000 a year.
Despite the big price tag, we keep seeing more stories about how Wall Street firms and traders keep trying to one-up one another. The result seems to be bigger and bigger trades and bigger and bigger paydays for the people who use this information and happen to end up on the right side of a trade.
And it doesn’t stop with data.
Today, trading firms pay for the privilege of placing their servers in the same building as stock exchange servers so trades can happen in milliseconds. As Jerry Adler wrote for Wired in 2012, To “make things fair, engineers scrupulously add extra lengths of cable to equalize the runs among all the servers. Yes, we are talking about a few feet plus or minus. At nearly the speed of light.”
This sounds insane to the average investor, particularly when we put it in the context of our investing experience. Most of us are focused on making sure food gets on the table, keeping a roof over our heads, putting a little toward college and maybe saving enough to retire before we turn 70.
The trading game is clearly rigged, but what we should care about — investing — isn’t. When we’re talking about Wall Street firms, we’re usually talking about traders. Traders by profession are much more interested in moving money around and finding ways to extract some in the process.
Average investors, on the other hand, have specific goals that they’re saving for in the long term. In fact, I think the explanation for Wall Street’s focus on speed comes down to something really simple: time.
Wall Street changes its mind (trades) every millisecond. Investors (in theory) change their portfolios as life changes over the years. Wall Street focuses on quarterly earnings. Investors focus on retiring in 30 years. It’s the ultimate short-term versus long-term strategy, and speed matters in the short term, but not so much in the long term.
We’re talking about two completely different universes. Traders care about trades measured in milliseconds and servers separated by a few feet. Investors care (or should, anyway) about our goals and values. Those two perspectives will rarely align because again, it’s about short term versus long term.
However, I understand how tempting it is to think we ought to play the trading version of the game.
After all, there’s a lot of money on the table, right? But we already have access to what these firms are doing in the form of hedge funds or “alternative” mutual funds, and they haven’t exactly been a game changer for most individual investors. For the fifth year in a row, hedge funds on average have trailed the Standard & Poor's 500-stock index, this year by a wide margin — 8.31 percent returns compared with the S.&P.'s 29.1 percent through November. . . .
Forget about hedge funds for a minute. Even most mutual funds disappoint, with almost 80 percent of them underperforming their index each year. But being hypercompetitive Americans, we don’t want to accept average. We work hard, so it shouldn’t be a stretch to find the 20 percent that will outperform....
Look, if your goal is to be a trader trying to play in the big leagues, then yes, you might be at a disadvantage if you’re competing against people who have more or faster information. But if your goal is to be an investor, then we already have the data that shows us how we win: Build a low-cost, diversified portfolio and hold on to it for a long time."
Summing Up
Owning a low-cost S&P 500 Index Fund or a low-cost, diversified portfolio of stocks isn’t a strategy that will make big headlines, and it most definitely won’t help pension plan managers and other "experts" max out their annual bonuses at our expense.
Neither will it allow the so-called "experts" and "fiduciaries" to pretend that they are safeguarding our financial future and acting on our behalf instead of their own.
Nor will it allow plan sponsors to fail to fund the 401(k) promised contributions in a timely and transparent manner.
Nor will it end up in our forfeiting any remaining balance at death. The money will go to our heirs and loved ones.
What a 401(k) will do is let time, stock market performance over time, and the nonpayment of big fees to "experts" work for us throughout our lives and beyond. Time will be on our side.
The message is simple and direct: don't believe the peddlers of the falsehood that pension plans are inherently superior to 401(k) plans. That's a crock.
Thanks. Bob.
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