People criticizing 401k and one senator's proposal

[StageLeft]

Linkarooney positooney

Some criticisms against 401ks, probably the most valid one that isn't made here is that people too close to or at retirement were heavy into stocks, so naturally a 50%+ reduction in the stock market isn't fun.

Anyway,

The proposal is contained in legislation that Sen. Blanche Lincoln (D-Arkansas) plans to file next month. At birth, every American child would be provided with a $500 contribution for a new investment fund structured for an 18-year investment horizon. Up to $2,000 could be contributed annually by the child or on behalf of the child, and low- and moderate-income families would be encouraged to save through matching contributions provided by the government. Account funds would be locked up until the child reaches age 18.

This has to be hair-brained if anything ever has been. All but the most responsible 18 year olds are utter idiots with money, can you imagine what would happen to that money if an 18 year old suddenly had access to it? This should instead be, if anything like this was used, education based. Of course a lot of low income kids won't go to college anyway, so the idea sucks overall.

 

[IndyColtsFan]

Originally posted by: Skoorb
Linkarooney positooney

Some criticisms against 401ks, probably the most valid one that isn't made here is that people too close to or at retirement were heavy into stocks, so naturally a 50%+ reduction in the stock market isn't fun.

Anyway,

The proposal is contained in legislation that Sen. Blanche Lincoln (D-Arkansas) plans to file next month. At birth, every American child would be provided with a $500 contribution for a new investment fund structured for an 18-year investment horizon. Up to $2,000 could be contributed annually by the child or on behalf of the child, and low- and moderate-income families would be encouraged to save through matching contributions provided by the government. Account funds would be locked up until the child reaches age 18.

This has to be hair-brained if anything ever has been. All but the most responsible 18 year olds are utter idiots with money, can you imagine what would happen to that money if an 18 year old suddenly had access to it? This should instead be, if anything like this was used, education based. Of course a lot of low income kids won't go to college anyway, so the idea sucks overall.

Sigh...hair-brained is an understatement. Where do these guys come up with these ideas?

 

[sactoking]

It's epic idiocy. First, from the article, there's this unattributed statement:

What gets lost in all of this is that 401(k)'s were never intended to be a primary retirement vehicle.

Nice job of quoting sources for reliability. 401(k) was designed to help defer compensation. That kind of meets the definition of retirement. And the author doesn't deign to elaborate upon his uncredited statement by offering what IS supposed to be a primary retirement vehicle. It's NOT Social Security. If it's not the 401(k) it CAN'T be the IRA, because they're virtually identical.

Now, for the Lincoln proposal. It's ridiculous. A) People who it would help won't be able to afford the $2000 contributions. B) You're putting a large chunk of change (lots of it taxpayer money) in the hands of 18 year olds, a demographic that is by-and-large irresponsible with money. C) THIS DOES ABSOLUTELY NOTHING TO FIX RETIREMENT. Most people don't retire at 18 and most people are either too stupid or too undisciplined to carry an account with potentially tens of thousands of dollars when they're that young.

Then, there's the Ghilarducci proposal. That's like the anti-Bush proposal. Instead of phasing out SS for private accounts, you'd be eliminating private accounts and expanding SS. That's a nightmare waiting to happen.

What really needs to be done to "fix" retirement is simple. Any tax-advantaged account through your employer must offer only low-fee/zero-fee index funds and bonds. If you want to dabble in other securities, open an IRA or brokerage account. That would solve 50% of your problems right there. Then, make it so after age 50 you can't be more than 50% into the index funds. That should provide an adequate cushion against recession while still allowing some capital appreciation and 'bounceback' if the market tanks.

 

[xj0hnx]

Just think of all the dubs, and beer you could buy.

 

[Pliablemoose]

Just write the law so it can't be cashed in till they retire... I sort of like it.

 

[irwincur]

Or require that cashing out at 18 would require it to be used for education. If not, put 55 or so as the minimum age to withdrawl.

Why not try it. Hell, the government wastes a lot more money on a lot less worthy projects. I would have loved to have this kick start. Even if you can only add a limited amount per year, it is still way better than what we have. SS is a net loss of a system, hardly a way to run any investment vehicle, especially one that is intended to be a last layer of security.

Here is the math. With $500 initial investment and say a limited $500 per year additional (add a low income credit or allow people to automatically roll this in from say a tax refund) an 18 year old would have about $17,800 for school. A lot more than I had. That is at a nominal 6%. If you use the stock market average of about 10% (including the recent recession and even the depression) you would have $27,800. So, you could limit to more secure lower rate investments and still do much better than SS, and have a good chunk of your college paid for.

At say 55. The 6% number would be $221,000 - that assumes that you only contribute $500 per year (this would most likely accelerate as you aged and started working). The 10% return would be $1,128,000. Tell me that SS does better than this...

It would be relatively self sufficient and it would solve two major issues. One, SS is not going to be solvent forever, and two, education is expensive as hell.

 

[txrandom]

Originally posted by: irwincur
It would be relatively self sufficient and it would solve two major issues. One, SS is not going to be solvent forever, and two, education is expensive as hell.

And education will be even more expensive once the government starts paying for it.

 

[irwincur]

Technically, they wouldn't be.

 

[Fern]

Originally posted by: sactoking
It's epic idiocy. First, from the article, there's this unattributed statement:

What gets lost in all of this is that 401(k)'s were never intended to be a primary retirement vehicle.

Nice job of quoting sources for reliability. 401(k) was designed to help defer compensation. That kind of meets the definition of retirement. And the author doesn't deign to elaborate upon his uncredited statement by offering what IS supposed to be a primary retirement vehicle. It's NOT Social Security. If it's not the 401(k) it CAN'T be the IRA, because they're virtually identical.
-snip-

401(k) plans date back 25 years or so. IIRC, back then Defined Benefit Plans ("DBP") were still the primary retirement vehicle.

401(k)'s and other Defined Contribution Plans ("DCP") may have been created to help people augment their DBP either because employers went bankrupt or people switched jobs with enough frequency that their benefits from DBP's suffered.

(I'd have to find go look up the commentary on the 401(k)'s to confirm my recollection. I may have some of those old law books, if I do and find the time I'll try to verify or refute that statement from author.)

But the advent of these DCPs have led to the demise of the DBP, which are more costly, complex and subject to stock market swings.

IMO, DCPs are insufficient as primary retirement vehicles. Far too many people are simply incapable of effectively managing their retirement assets. E.g., they stay heavily invested in equities far too late in their working lives and are stock markets declines like we've recently seen. While the same declines put an enormous burden on a company trying to manage it's DBP, at least (hopefully) that company continues in business and can make up for those losses. OTOH, when that happens to an individual near retirement age, they simply won't be able to continue working or hold on those stocks for the market to rise again.

Fern

Fern