Re: The problems with 401(k)

On Jan 2, 6:00 am, Josh Rosenbluth <jrosenbl...@xxxxxxxxxxx> wrote:
On Jan 1, 9:33 pm, mg <mgkel...@xxxxxxxxx> wrote:



On Jan 1, 4:00 pm, Josh Rosenbluth <jrosenbl...@xxxxxxxxxxxxxxxxxx>
wrote:

mg wrote:
On Jan 1, 7:06 am, Josh Rosenbluth <jrosenbl...@xxxxxxxxxxxxxxxxxx>
wrote:

Islander wrote:

So, you want to manage your own investments?

For most people, the deck is stacked against them.  Brooks Hamilton,
owner of a Texas company that designs 401(k) plans for corporate
clients, with access to a data base of 50,000 owners of 401(k) accounts
scattered across the country found a wide discrepancy in the average
returns between the top quintile and bottom quintile WAGE EARNERS.  The
top 20% of wage earners enjoyed highest investment return, 20-30%, while
the bottom 20% of wage earners averaged only 4% investment return.

How is it possible to earn  20-30%?

The author, Brooks Hamilton, has obviously made a mistake here. He
does explain his study in more detail at the following website, but
nevertheless, he does repeat the mistake.
http://www.pbs.org/wgbh/pages/frontline/retirement/interviews/hamilto...

The link clearly states his numbers were for only one example year.
That could easily happen without a mistake.

"Say the bottom 20 percent had an investment return for the year of 4
percent. The top 20 percent would be anywhere between five and seven
times that number"

The link also hints at the answer to my second question as to why lower
incomes earners fare worse.

"the power was being given too often to a novice who didn't know a stock
from a bond."

"Three hundred don't even participate in the plan. Probably 500
contribute too little too late. ... And of the 200 that join the plan
and contribute materially, ... 150 of those 200 underperform the market."

"You've got to make market returns. You don't have to beat the market;
that's a fool's game. You have to be the market."

So, he isn't arguing (as I had first thought from the initial post) that
you need professionals, along with their management fees, to pick which
stocks or mutual funds to invest in.  All you need is the most basic
knowledge about the major investment types, and a bit more knowledge on
how to diversify across them as a function of how close you are to retiring.

I appreciate his point that even the former, let alone the latter, is
beyond the reach of so many people.  But, don't mistake his message..  He
is not saying you need professionals to make those investments.
Investing in index funds (typically with fees less than 0.5%) will "make
market returns".

There's an article that obviously pertains to the same study at:http://www.dallasnews.com/s/dws/bus/scottburns/columns/archives/1998/...

The article indicates that the study included results for the year
1997. In that year the S&P500 index went from 748 to 975, for a gain
of 30.3% according to my calculations. In that study, Hamilton
compared the returns from two companies. In one company, highly
compensated employees made a return of 17.7% and non-highly
compensated employees achieved a return of 15.2%. In the other company
the highly compensated received a return of 24.1% and the non-highly
compensated received a return of 18.5%.

There was a big difference in the returns for individual employees.
The average best 5 made 42.2% and the average worst 5 lost 8.8%. At
the end of the article, Hamilton is quoted as follows:

"Face reality." Mr. Hamilton says. "Some people don’t care about
investments and don’t want to learn. Expecting them to learn is like
asking all employees to master classical piano in their spare time at
home. It’s not going to happen. That means employers need to give
employees a managed account option, one where the employees can give
the responsibility to a professional."

I, personally, wouldn't have any objection to employers offering an
option to have professionals manage their account, but the danger I
see is that politicians and others will misinterpret this data to mean
that professionals can achieve better (risk adjusted) returns than
employees who manage their own accounts and professionally managed
accounts might become mandatory.

It is sad that learning the basics of investing is like learning
classical piano for so many.  Yes, these folks need professional help,
but that help will cost them in management fees that could have been
avoided by learning what should be chopsticks.

On the other hand, there is a market for low-cost professional help.
I could be the "professional" who does nothing more than pick the
appropriate index funds for a 0.75% fee.

Josh Rosenbluth

If I'm not mistaken, history has shown that, on average, index funds
do better than "professionally" managed funds. I think the key is for
management to offer actively managed funds that have at least average
performance plus some index funds and then advise 401K participants
that, on average, index funds do better. In addition, management
should assign a risk rating to each fund. So, that participants can
make their choices accordingly.
.

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