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View Diary: Middle Class Dies Twice in Detroit (63 comments)

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  •  Underperform compared to what? (0+ / 0-)

    My 401K is mostly in an S&P 500 index fund... hard for it to under perform the market.

    My fees are a fraction of a percent - I don't need a pile of crap investments at high cost.

    •  Compared to defined benefit plans (1+ / 0-)
      Recommended by:
      Paul Ferguson

      Or even the S&P 500 as a benchmark:

      The vast majority of 401(k) plans are populated with actively managed funds, where the fund manager attempts to beat a designated benchmark, like the S&P 500 index.

      [...]

      Ellis notes the daunting odds of beating the benchmark. Over a ten year period, only 30 percent of actively managed funds outperform. That percentage falls to 20 percent over a 20 year period.

      And because 401k plans are managed by the individual rather than professional money managers, they underperform:
      Challenges clearly remain: At the end of 2007, the median 401(k) account balance for people age 60 and above was $34,420, according to Hewitt, meaning half of the group had balances even lower. To be sure, some retirees have other savings, including money rolled into individual retirement accounts from 401(k)s at prior employers.

      But studies are starting to document that traditional pension plans, which typically are overseen by professional money managers, outperform programs in which workers control an investment account, like 401(k)s. Between 1995 and 2006, "defined benefit" pension plans, so-named because they give retirees a specified monthly benefit, outperformed defined-contribution plans, in which the employer makes a specified contribution to the worker's account, by about one percentage point a year, for a cumulative dollar difference of nearly 14%, according to a June report by Watson Wyatt.

      And the study cited was only until 2006. Imagine if one had a 401k and was to retire in 2009 when the market crashed. Good luck with that now that all the investment risk was on you.

      Imagination is more important than knowledge. Albert Einstein

      by michael in chicago on Wed Jul 31, 2013 at 07:56:08 AM PDT

      [ Parent ]

      •  My 401K is mostly in the S&P 500 (0+ / 0-)

        so it exactly matches the benchmark.

        Compared to defined benefit plans (0+ / 0-)
        Or even the S&P 500 as a benchmark:
        How do you compare with a defined benefit plan?  How much does the defined benefit plan cost you as an employee?
        The vast majority of 401(k) plans are populated with actively managed funds, where the fund manager attempts to beat a designated benchmark, like the S&P 500 index.
        Yup... not a good idea.  So?
        Between 1995 and 2006, "defined benefit" pension plans, so-named because they give retirees a specified monthly benefit, outperformed defined-contribution plans, in which the employer makes a specified contribution to the worker's account, by about one percentage point a year, for a cumulative dollar difference of nearly 14%, according to a June report by Watson Wyatt.
        Yup... if you get your benefit.  But think how many people have not.
        •  Those who have not... (0+ / 0-)

          Generally are in private industry where bankruptcy is used as a legal means to escape pension responsibilities and essentially steal from the working class who built the company in the first place.

          However, CPS and that State of Illinois are not private sector companies and pensions have constitutional protections at both the state and federal level.

          The cost to the employee varies by plan. In Illinois, Teacher Retirement System members contribute 9.4% each pay period to TRS.

          Imagination is more important than knowledge. Albert Einstein

          by michael in chicago on Wed Jul 31, 2013 at 08:34:52 AM PDT

          [ Parent ]

          •  When a company does not have money to support (0+ / 0-)

            a pension plan then it does not have the money.

            You can't get blood from a stone.

            The cost to the employee varies by plan. In Illinois, Teacher Retirement System members contribute 9.4% each pay period to TRS.
            That's the deduction from their pay check.

            But it's not the cost.

            Remember - if the plan ends up overfunded it's not their money, and if it is underfunded the employer must make up the difference if it can.

            That means you can't calculate the actual cost.

            Presumably, the employer is looking at the total actuarial cost of the plan when calculating how many teachers it can afford and how much it can pay them.  But there is no way to know what salary teachers would get if they and their employer were not paying into TRS.

        •  Matching the S&P 500 (0+ / 0-)

          If your 401k matches the returns of the S&P 500 then you lost 38% of your retirement fund in 2008. This occurred after you lost 10%, 13% and 23% of your retirement fund in 2000, 2001 and 2002.

          If you were to retire in 2009, you'd be in a pretty rough spot because you now have no defined benefit and bear all the investment risk.

          Imagination is more important than knowledge. Albert Einstein

          by michael in chicago on Wed Jul 31, 2013 at 08:41:38 AM PDT

          [ Parent ]

        •  Or to put it another way (0+ / 0-)

          If you ditched a defined benefit plan for a 401k and had a $50,000 balance in the year 2000, then by the end of 2012 you'd have $49,232 in your 401k plan to retire on after 12 years of returns matching the S&P 500 average.

          The defined benefit plan would exceed this easily because defined benefit plans are funded through growing contributions of current members (based on active working member salaries,  not retirees on fixed incomes), investment return (professionally managed) and employer contributions (similar to Social Security). The risk is not born solely by the individual investor and the retirement benefit known in advance to allow for secure retirement planning.

          Imagination is more important than knowledge. Albert Einstein

          by michael in chicago on Wed Jul 31, 2013 at 09:22:02 AM PDT

          [ Parent ]

    •  U iz so smart and speshul. n/t (0+ / 0-)
    •  Avoiding the fees is smart (0+ / 0-)

      Clear advantage of an index fund.  But avoiding underperformance of the market only helps you if the market doesn't tank, which it does from time to time -- and presumably will continue to do as long as we don't reinstate Glass-Steagall etc.  There's definite value to having benefits guaranteed outside the market.

      Note: I'm at Trilogy Interactive, where I work for various Democratic campaigns.

      by I voted for Kodos on Wed Jul 31, 2013 at 02:58:06 PM PDT

      [ Parent ]

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