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The 401k is an invention that is yet to prove its efficacy. The first 401ks were opened in 1978, so if you were entering the workforce then you’d be retiring t

The 401k is an invention that is yet to prove its efficacy. The first 401ks were opened in 1978, so if you were entering the workforce then you’d be retiring this decade! So, we will see if this privatization of pensions really benefits us all or merely enriched a generation of asset managers while absolving the corporate and the government from providing pensions for workers.

kbolino 2y ago
Traditional pensions are fundamentally unsustainable endeavors under modern demographics. You cannot pay decent benefits to a growing retired population while collecting reasonable dues from a shrinking working population. As we've seen, all retirement funds, even the remaining pensions, have largely switched their investments to the stock and bond markets in the vain hope that this fundamental conundrum will be solved through moonshots and financial tricks. The 401(k) is just one piece of a much bigger puzzle.
- vineyardlabs 2y ago
  I agree with your general idea here but could it not be argued that pensions are just an abstraction on top of 401ks in the sense that if the demographics are shifting such that non-producers outweigh producers then you would expect the economy and business profits to suffer. These effects would cause broad slow growth or even reductions in business valuations, and therefore poor performance in investment accounts broadly.
  - kbolino 2y ago
    Yes, and I think that describes the past few decades in Japan (among other factors). Other options included pensioners taking a haircut and/or workers taking a paycut, neither of which is particularly palatable and still runs us into the ground eventually. Increasing corporate taxes could square the circle for a little while, but then corporations would slowly move more operations offshore, decreasing tax revenues eventually anyway. There's also the option of cutting other government expenditures, but eventually that stops working and at least some of the things that were cut can't stay un(der)funded forever. The only other (distantly) feasible idea I can think of would be, again with an eye to Japan (of the past), near-total isolation from other countries economically, but that would have an even more substantial stagnating effect.
- sangnoir 2y ago
  > You cannot pay decent benefits to a growing retired population while collecting reasonable dues from a shrinking working population How does this jibe with ever-increasing profits?
  - kbolino 2y ago
    An S&P 500 index fund has an average annualized rate of return of about 8% over the past 50 years. It is barely beating inflation but if you can accept the risk that you might be in a -10% year at any given time instead of a +20% year then it's the best place to put your money. This is where those profits are going, and that long-term rate of return hasn't moved much. A traditional pension fund cannot afford that kind of risk without a massive cash buffer and could not have captured that value anyway because it cannot cover its own firm's losses with some other firm's gains. After all, it's not like the same 500 companies are occupying the index as decades ago, and even those that stick there have changed relative positions a lot. The only thing that could have conceivably replaced traditional pensions and captured all of this value and given it to the workers "fairly" without suppressing the factors that made it possible would have been a sovereign wealth fund run passively but competently by the government, but such a thing is in and of itself a moonshot.
julienchastang 2y ago
I don't have the references on my finger tips, but basically I recall 401ks to be a bad deal for most employees because of mismanagement by the account holder, high fees, ill timed trades, etc. A few 401k (or 403b) holders have done very well, however, if their plans offered low-cost index funds, contributed regularly and avoided moving money around at the wrong time or at all.
- SoftTalker 2y ago
  No doubt there is a history of shenanigans in 401ks, especially early on. But if you're dollar-cost averaging into low-cost index funds, you should avoid that.
- pdonis 2y ago
  > A few 401k (or 403b) holders have done very well, however, if their plans offered low-cost index funds I think it's more than "a few". For one thing, many 401k-equivalent funds that government employees can make contributions to are low cost index funds, and there are lots of government employees. For another thing, most 401ks offered by large corporations also offer low cost index funds, which many employees contribute to because they're usually the default that you get if you don't pick something else, and there are lots of employees of large corporations.
  - julienchastang 2y ago
    Low-cost index funds don't protect you from ill timed trades. I remember reading during the 2008 financial crisis that many account holders basically bailed into much more conservatively allocated funds as they watched there net worth plummet and were not able to benefit when the markets rebounded. They bought high and sold low. Most people do not have the stomach to watch their retirement savings quickly evaporate, unfortunately.
    - pdonis 2y ago
      > Low-cost index funds don't protect you from ill timed trades. Nothing can protect you from ill timed trades. However, trades can only be ill timed if they are made. If you just pick an index fund with an appropriate time horizon for your planned retirement and then leave it alone, you don't have to worry about ill timed trades because you aren't making any trades at all.

kbolino 2y ago

Traditional pensions are fundamentally unsustainable endeavors under modern demographics. You cannot pay decent benefits to a growing retired population while collecting reasonable dues from a shrinking working population. As we've seen, all retirement funds, even the remaining pensions, have largely switched their investments to the stock and bond markets in the vain hope that this fundamental conundrum will be solved through moonshots and financial tricks. The 401(k) is just one piece of a much bigger puzzle.

vineyardlabs 2y ago
I agree with your general idea here but could it not be argued that pensions are just an abstraction on top of 401ks in the sense that if the demographics are shifting such that non-producers outweigh producers then you would expect the economy and business profits to suffer. These effects would cause broad slow growth or even reductions in business valuations, and therefore poor performance in investment accounts broadly.
- kbolino 2y ago
  Yes, and I think that describes the past few decades in Japan (among other factors). Other options included pensioners taking a haircut and/or workers taking a paycut, neither of which is particularly palatable and still runs us into the ground eventually. Increasing corporate taxes could square the circle for a little while, but then corporations would slowly move more operations offshore, decreasing tax revenues eventually anyway. There's also the option of cutting other government expenditures, but eventually that stops working and at least some of the things that were cut can't stay un(der)funded forever. The only other (distantly) feasible idea I can think of would be, again with an eye to Japan (of the past), near-total isolation from other countries economically, but that would have an even more substantial stagnating effect.
sangnoir 2y ago
> You cannot pay decent benefits to a growing retired population while collecting reasonable dues from a shrinking working population How does this jibe with ever-increasing profits?
- kbolino 2y ago
  An S&P 500 index fund has an average annualized rate of return of about 8% over the past 50 years. It is barely beating inflation but if you can accept the risk that you might be in a -10% year at any given time instead of a +20% year then it's the best place to put your money. This is where those profits are going, and that long-term rate of return hasn't moved much. A traditional pension fund cannot afford that kind of risk without a massive cash buffer and could not have captured that value anyway because it cannot cover its own firm's losses with some other firm's gains. After all, it's not like the same 500 companies are occupying the index as decades ago, and even those that stick there have changed relative positions a lot. The only thing that could have conceivably replaced traditional pensions and captured all of this value and given it to the workers "fairly" without suppressing the factors that made it possible would have been a sovereign wealth fund run passively but competently by the government, but such a thing is in and of itself a moonshot.

julienchastang 2y ago

I don't have the references on my finger tips, but basically I recall 401ks to be a bad deal for most employees because of mismanagement by the account holder, high fees, ill timed trades, etc. A few 401k (or 403b) holders have done very well, however, if their plans offered low-cost index funds, contributed regularly and avoided moving money around at the wrong time or at all.

SoftTalker 2y ago
No doubt there is a history of shenanigans in 401ks, especially early on. But if you're dollar-cost averaging into low-cost index funds, you should avoid that.
pdonis 2y ago
> A few 401k (or 403b) holders have done very well, however, if their plans offered low-cost index funds I think it's more than "a few". For one thing, many 401k-equivalent funds that government employees can make contributions to are low cost index funds, and there are lots of government employees. For another thing, most 401ks offered by large corporations also offer low cost index funds, which many employees contribute to because they're usually the default that you get if you don't pick something else, and there are lots of employees of large corporations.
- julienchastang 2y ago
  Low-cost index funds don't protect you from ill timed trades. I remember reading during the 2008 financial crisis that many account holders basically bailed into much more conservatively allocated funds as they watched there net worth plummet and were not able to benefit when the markets rebounded. They bought high and sold low. Most people do not have the stomach to watch their retirement savings quickly evaporate, unfortunately.
  - pdonis 2y ago
    > Low-cost index funds don't protect you from ill timed trades. Nothing can protect you from ill timed trades. However, trades can only be ill timed if they are made. If you just pick an index fund with an appropriate time horizon for your planned retirement and then leave it alone, you don't have to worry about ill timed trades because you aren't making any trades at all.