Guest Editorial

Don't Throw 401k Baby Out With the Bathwater

By Jane White, President of the Retirement Solutions LLC and a former financial journalist. She can be reached via email at Jane@retirement-solutions.us. Retirement Solutions is a non-partisan organization dedicated to educating the public about saving for retirement.

That AARP would even take seriously the notion of replacing stocks with bonds in 401k plans ("401k Plans: Too Risky for Retirement Security?") reflects the woeful state of innumeracy in this country.

401k plans have problems but it's the stingy employer match that's making them ineffective, not the fact that employees invest in stocks. What's more, if employers were forced to use only bonds in defined benefit plans employers would probably terminate the plans-and I wouldn't blame them. Why? Over the long haul stocks outperform bonds by huge margins so employers would have to contribute more to ensure that their employees are on track.

Three trillion dollars haven't been "erased" from 401k plans, it's simply that the share values are temporarily down. The problem with the stock market isn't volatility, it's that the mutual fund industry and brokerage community alike don't tell investors to "stay the course," which enables panic-selling-and volatility. They didn't do so on Oct. 19, 1987, one of the largest one-day slumps in history, causing millions of investors to lose out two years later when the S&P 500 turned in an whopping return of more than 30%--one of only 12 calendar years since 1926 when the market performed that well. Nor did the industry do so nearly 20 years later during a slump in March of 2007; two scant months later the S&P 500 closed above 1500 for the first time in more than six years, the longest run of bullishness since 1944. In the 12 calendar years since 1926 that the stock market has produced better than 30% annual returns; five of these bullish years followed a year of negative returns-most likely because the savvy bargain-hunters bought cheap stocks dumped by not-so-savvy investors, causing the share prices to swoon.

"Many Australians are on track to retire with nest eggs of half a million dollars or more-and they've got plenty of stocks in their portfolios."

What's more, if Teresa Ghilarducci's recommendations to replace stocks with bonds in 401k plans had taken effect the day she presented testimony in Congress in October 401k investors would be hopping mad. After its initial slump, the Dow Jones Industrial average increased by more than 10% on Oct. 22nd.

Many Australians are on track to retire with nest eggs of half a million dollars or more-and they've got plenty of stocks in their portfolios. They are "pension richer" because all employers are required to contribute 9% of pay, an approach we should take in the U.S.-our employer contribution rate of 3% is the second lowest in the world. Bottom line: let's actually fix 401k plans rather than throw the baby out with the bathwater.

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