How much money is in your 401 (k) or similar DC plan?

[Liep]

I just received an overview from my pension company. The prognosis is good, if I keep this or a similar job for the next 39 years.

Great.

[DGuller]

Jake:  I agree with you that a fix is needed.  Where we part ways is whether the fix is needed because people lack financial sophistication or because they are meatheads.  Sav's coworker "hasn't gotten around to it" not because of a lack of financial sophistication.

One of the reasons people don't get around to it is because it's utterly complicated, which can easily give financially unsophisticated people decision paralysis.

[Admiral Yi]

How in the world is it complicated to select a % of your income, then select a fund or funds from a list?

[DGuller]

How in the world is it complicated to select a % of your income, then select a fund or funds from a list?

What % do you need to set aside?  Not the default one, that's for sure.  What fund out of many dozens do you choose?  So you read up a little, and hear about money market, value, balanced, growth, real estate, international, stock index, bond index, blah, blah, blah.    I'll get back to it.

I think you vastly underestimate how intimidating investing is to people not educated in it.  My dad is an economist by education, accountant by trade, and my mother was a bookkeeper, they always lived below their means, and yet even such people not unfamiliar with numbers came to the 401k party very late in the game (and they already started way behind, having come to the country in their 40ies).  None of us knew for a fact what we needed to do, and it's the kind of decision that is never burning on any particular day.  I still don't know what to do, but luckily my 401k had the target retirement funds, so I just went into that.  I imagine it just gets more intimidating the less educated you are, knowing how mismanaging your funds can lose you a lot of money.

[Admiral Yi]

It's paralyzing if you think there is some magical fund in that list that is going to explode tomorrow like a dot.com IPO and you're going to be a schmuck for missing it.  Once you get over that, who gives a shit?  Just plop some money in whatever fund and forget about it.

My 401k has one of those age geared mixed funds too, as a default.  Don't want to think about it, just let it go there.  No big deal.

[DGuller]

It's paralyzing if you think there is some magical fund in that list that is going to explode tomorrow like a dot.com IPO and you're going to be a schmuck for missing it.  Once you get over that, who gives a shit?  Just plop some money in whatever fund and forget about it.

Risk averse people are hesitant to put money into investments they don't understand, especially if such investments can lose you money.  It takes a lot of education to develop such a carefree attitude that you're comfortable just plopping the money and forgetting it.  Most financially uneducated people don't have the comfort level with such a strategy, they have to watch their hard-earned money and adjust (which we know is a very bad strategy, but that's because we're educated).  And speaking of education, personal finance is probably the worst field imaginable when it comes to the quality of self-help material.  There are plenty of charlatans and champion coin tossers sharing their steaming pile of wisdom in their books.

My 401k has one of those age geared mixed funds too, as a default.  Don't want to think about it, just let it go there.  No big deal.

Those are a relatively new.  I don't think there were many of those around ten years ago, if any.

[Admiral Yi]

What I could buy is if you were to say when you and your family walked off the gangplank you had no clue what a mutual fund was and thought half of them could be Florida swamp land.  I've talked to a lot with co-workers at my present job about our 401k.  99% of them took the default amount and the default fund (the age thingy) and never gave it a second thought.  Nobody had a stroke and swallowed their tongue because they couldn't choose an amount or fund. Actually, most of them probably never even gave it a first thought.  Which is too bad, because at the default amount you're leaving some matching money on the table.

Now what does sound a little trickier is the Canadian case.  My impression is that a company match is not very common, which makes choosing an amount a little more perplexing.

[DGuller]

Again, default enrollments and targeted retirement year funds are a relatively new phenomenon.  They aren't going to help people in their fifties and sixties, though I guess better late than never. 

And if you invest default amounts, you may almost not bother at all.  Assuming someone gets $50k a year, a pretty nice salary for most people, the default contribution of 3% is going to amount to $1500 a year.  Let's assume a generous 100% employer match, so $3000 a year.  That'll help you upgrade from a store brand to Pedigree for special occasions, but comfortable retirement it would not make.

[Admiral Yi]

My default is 6%, 100% match up to 6, 50% match from 6 to 9.

Last time we talked that seemed closer to the norm than 3%.

And as I said before even if you don't have a default %, the matching policy gives you a pretty solid anchor. 

[DGuller]

My default is 6%, 100% match up to 6, 50% match from 6 to 9.

Last time we talked that seemed closer to the norm than 3%.

And as I said before even if you don't have a default %, the matching policy gives you a pretty solid anchor.

That is a very reasonable program that your company has.  I bet it's more generous than typical, with a higher default contribution rate than typical.

And, in any case, what you have to remember is that these things have improved quite a bit.  The people who you call meatheads did not have such things in the past.  We've probably learned some lessons, and dialed in soft paternalism big time to start people off with good choices by default, but that doesn't help the pioneers who already missed the boat.

[Admiral Yi]

The default % may be a relatively recent innovation, but I'm pretty sure the company match is not.  And as I already said the company match gives you a nice solid anchor for your choice.

[DGuller]

The default % may be a relatively recent innovation, but I'm pretty sure the company match is not.  And as I already said the company match gives you a nice solid anchor for your choice.

Well, the default % is really the key.  That's the game changing difference, between having to make a decision, some kind of a decision, and having it pre-made for you.  Investing up to at least a company match seems like a no-brainer to you, but without a default contribution, it's still a decision that needs to be actively made.

[Admiral Yi]

Well, the default % is really the key.  That's the game changing difference, between having to make a decision, some kind of a decision, and having it pre-made for you.  Investing up to at least a company match seems like a no-brainer to you, but without a default contribution, it's still a decision that needs to be actively made.

A decision which does not require massive financial sophistication.

[DGuller]

Well, the default % is really the key.  That's the game changing difference, between having to make a decision, some kind of a decision, and having it pre-made for you.  Investing up to at least a company match seems like a no-brainer to you, but without a default contribution, it's still a decision that needs to be actively made.

A decision which does not require massive financial sophistication.

We can go back and forth on this all week.  That won't change the fact that majority of near-retirees have little to nothing in their 401k plans.

[Admiral Yi]

Where are you getting that from?