401(k) Financial Weapon of Mass Destruction?

[AllentownJake]

I know this will not be the most popular post on here as many love their 401(k)s but at least take an open mind to this.

A lot of the growth in the stock market over the past 30 years can be attributed to this investment vehicle. Pensions purchased stocks but by law were required to have a higher diversification with bonds as well as cash. Americans putting their retirement money into the financial markets has resulted in a boom for Wall Street.

I used to work in Financial Services, and in the beginning of my career baby boomers were the big topic of discussion and how to help them manage their assets as they go into retirement. I would always ask the smart guys and the big wigs what was going to happen to the market values as these people start liquidating assets. Their response is that the assets would be bought by younger employees investing in their 401(k). Knowing that there were more baby boomers than my generation, I always kind of questioned that. I was patted on my head for my inquiry and told not to worry about it. With the economic situation as it is today I question it even further under a different premise.

What if the generation that comes up behind you simply isn't as wealthy as the generation that proceeded it. What happens to these retirement account values than. If everything is truly based on supply and demand and there are less workers to buy the assets of the retiring class, doesn't it mean that the retiring workers assets will be reduced in value?

We saw a myth that home values always appreciate go up in smoke this year. Is the next myth the the savings in 401(k)s are somewhat safe over time. That the market always goes up? What happens when as someone is enjoying retirement, their assets continue to decline not rise with time as they withdrawal money?

We saw a massive amount of wealth on paper disapear overnight in this country. Are we truly wealthy or is are wealth simply on paper only and when people go for their assets the true value of those assets will be realized.

Time will only tell.

[MadHound]

1. Considering that institutional investing and corporate investing are the two largest markets

I would say that there is going to be minimal fall out from this.

I see your point, but the simple fact of the matter is that the demand the boomers generate is simply dwarfed by the demand created by institutional investing, corporate investing, and investing by the wealthy.

[AllentownJake]

2. Most 401(k) contributions are funneled through

Institutional Investors and Pension funds are Institutional investors.

Most institutional investing is done for retirement accounts.

If you want to include Insurance companies you will have liquidation of assets for annuities and death benefits.

[AllentownJake]

3. I want to add

that I used to work for a company that owned a Mutual Fund organization.

Most of the sales of mutual funds were through employee sponsored plans. Individual sales of mutal funds were a much smaller portion of the business.

[Omaha Steve]

4. Post this in the Labor Forum too please

It goes hand in hand with what we try to do in that forum.

OS

[AllentownJake]

11. Done

[slackmaster]

5. I have to wonder where you got these strange ideas...

We saw a myth that home values always appreciate go up in smoke this year. Is the next myth the the savings in 401(k)s are somewhat safe over time.

Nobody ever told me either of those were true, and by the time I had entered the working world I'd already seen enough business cycles to know that a home is something you live in and stock prices go up and down.

We saw a massive amount of wealth on paper disapear overnight in this country. Are we truly wealthy or is are wealth simply on paper only and when people go for their assets the true value of those assets will be realized.

I guess I was lucky to have developed an understanding of the difference between paper assets and wealth before I had anything worth worrying about.

K&U

:kick:

[Hannah Bell]

6. it's not about *you*, contrary to your apparent obsession with your own cleverness.

[slackmaster]

8. I've never claimed to be clever, and I have made plenty of financial mistakes in my life

But I've never been so naive as to think that any investment was a sure thing.

Maybe what we need in this country is having basic finance taught in public schools.

[AllentownJake]

10. I agree on that

The point of my post was not to point out that most people are financially illiterate.

I'm speaking of a possible systematic problem. People have assumed that they will be safe investing in their 401(k). I believe that a huge portion of the increase in the markets over the past 30 years has come from retirement accounts. My question is if there is not a generation behind them with the income levels to purchase the assets of the retirees, will the retirees assets decrease in value as the assets are liquidated.

Supply and Demand. The 401(k) created a bigger demand for equities. As those assets are liquidated and there is less investment into 401(k)s due to several factors effecting the next generation of employees do those assets go down in value.

I could be totally off base. It is just a simple question.

[sendero]

14. Yes..

.... but the media has been preaching a "buy and hold" game for decades. Most people are not sophisticated enough to understand what is happening.

But I suspect a lot of folks after taking a haircut in 2000 and again in 2008 are starting to get the message, stocks are not only NOT a good investment - the entire game is rigged to run the markets up and the smart money gets out at the top and leaves j6p holding the bag, again and again and again, until j6po wises up.

This j6p has wised up already.

[AllentownJake]

18. People need to wake up to the fact that the news

is supported by advertising dollars and certain things don't get reported because it would piss off the people purchasing advertising.

Why are there countless expose's on charities and government and few on corporations...because corporations pay the bills for the news. You don't run expose's on the hand that feeds you.

Big Tobacco got killed only after their ability to advertise was taken away.

[AllentownJake]

9. The myth was propoganda

sold by people trying to make money off of other people.

They love showing a chart of the DJIA over the past 70 years and how it has increased in value. What they don't tell people is that this is what the DJIA looked like in 1929

Allied Chemical
American Can
American Smelting
American Sugar
American Tobacco B
Atlantic Refining
Bethlehem Steel
Chrysler
General Electric Company
General Motors Corporation
General Railway Signal
Goodrich
International Harvester
International Nickel
Mack Truck
Nash Motors
National Cash Register
Paramount Publix
Postum Incorporated
Radio Corporation
Sears Roebuck & Company
Standard Oil (N.J.)
Texas Company
Texas Gulf Sulphur
Union Carbide
U.S. Steel
Westinghouse Electric
Woolworth
Wright Aeronautical

Most of these organizations don't exist in 2009.

[Statistical]

21. Which is a good reason why when a stock you own is removed from an index...

to reconsider ownership of that stock.

Our economy has changed of course the DOW & S&P500 change with it. All the changes are public.

If you put money into DJIA either buying the stocks directly or buying into a fund that tracks the DOW you would make changes the DJIA makes changes and you would have gained exactly as much as the DOW has over last 20, 30, 40 years.

To pretend that changing the index is some slight of hand shows a lack of understanding on how it works.

[AllentownJake]

7. I never made these assumptions either hence I was questioning

my superiors in the Financial Service Industry at 23 about the real saftey of people's retirement accounts.

I also live in Allentown, PA and went to Temple in North East Philadelphia. I can drive through a once very affluent neighborhood and see homes that there was a considerable amount of investment constructing falling apart.

But if you asked the average American in 2006, their home wasn't just a home it was an investment and they assumed that the stock market will always increase in value.

[sendero]

12. Anyone that still has substantial assets in the stock market..

... deserves to retire eating dog food. It could not be more obvious that the stock market is totally rigged now, and if you happen to make money you just got lucky and timed your move with the big boys.

[AllentownJake]

13. Getting your money out of a 401(k)

before you retire isn't easy and you have a limited choice in your investment options.

Your choice is normally Equity based mutual funds, Corporate Bond Mutual Funds, and Muni bond funds, and a money market account.

[sendero]

15. Money market..

... is better than all of the other options. At least you will enjoy a return OF capital.

[AllentownJake]

16. Just be thankful they didn't get Social Security

that was lobbied for theft to the highest degree.

[Ghost Dog]

22. All in US Dollar values? n/t

[alcibiades_mystery]

17. The 401k was pure class warfare

Changing the defined benefit into the defined contribution. It turns workers into a faux capitalist class. And yes, the 401k has its roots in NYC investing its workers pension funds in the height of the financial crisis of the 1970's.

[Statistical]

19. You are linking 401K with equities.

401K is simply a bucket. Saying a bucket full of toxic waste is the fault of the bucket is kinda stupid.

If you are worried then you have a couple options:
a) larger exposure to foreign equities. BRIC (Brazil, Russia, India, China)
b) bonds. companies have debt and they tend to pay it on time all the time. There still is some risk but default rates are very low for investment grade debt.
c) treasuries. almost all 401K plans have either a T-bill fund or a combination T-bill & Corporate debt fund

The best approach is a mix:
Domestic Equities: 40%
International Equities: 20%
Bonds: 20%
T-bills & Cash: 20%

As you get older the equity portion slides for 60% to 30% as bonds rise.

I think the biggest problem is EDUCATION.
People 100% in domestic equities have no idea the level of risk they are exposed to.

[Ghost Dog]

20. What if the intention was simply to feed off those 401(k) holders' assets

(or even relieve them of same) on the part of some Wall St. "Players"? While the going was good, as you point out?

[AllentownJake]

23. Those assets have supported the increase in executive pay over the past 30 years

[Klukie]

24. What a great discussion....

I don't know much about the workings of wall street, but I often wondered if a company matched money for a share of their own stock isn't that like artificially inflating the value somewhat or is it just simply a smart way to reinvest in your company? Either way, a great discussion for those of us who don't know much about the workings of it all.

[HCE SuiGeneris]

25. "Killing Sacred Cows"

Garrett Gunderson would agree with you, as do I.