I know that the contributions, dividends, and capital gains are tax free. I know that sometimes an employer can kick some cash in, but that's not a requirement. Mostly I'm curious how much choice over investments the employee has. Are you given a list of approved mutual funds by the employer?
I must have read 12 articles in various sources on 401ks in the last week but I've never had one so I'm curious. Curious if all the 59 year olds featured in these articles who just lost 40% of the value of their life savings did so because they overloaded on equities or because they had no choice.
Quote from: Admiral Yi on April 19, 2009, 06:42:24 PM
I know that the contributions, dividends, and capital gains are tax free. I know that sometimes an employer can kick some cash in, but that's not a requirement. Mostly I'm curious how much choice over investments the employee has. Are you given a list of approved mutual funds by the employer?
I must have read 12 articles in various sources on 401ks in the last week but I've never had one so I'm curious. Curious if all the 59 year olds featured in these articles who just lost 40% of the value of their life savings did so because they overloaded on equities or because they had no choice.
You are. At least the plans I've seen have about 10 choices, with at least one money market option, a safe bond fund of some sort, and one indexed equity fund. You usually have an option for a company stock fund, with the company match sometimes paid entirely in company stock.
I was speaking to a woman at my company that has been around 10-15 years and she told me that until recently she was putting all of her 401k money into the company stock fund. The stock has performed very poorly: I'd guess she is down 50%+ of her contribution basis (maybe as high as 75%). She didn't make a very good decision, but it is still unfortunate that she was diligent saving for all those years and now isn't going to have as much as she should for retirement.
You're a prince Fredo. Couple more questions if you're in the mood. :)
A 401k employee is stuck with those 10 choices until they leave the company? What happens then?
Also, do IRA withdrawals get treated as regular income? You're not on the hook for all accumulated capital gains are you?
Quote from: Admiral Yi on April 19, 2009, 07:39:25 PM
You're a prince Fredo. Couple more questions if you're in the mood. :)
A 401k employee is stuck with those 10 choices until they leave the company? What happens then?
Also, do IRA withdrawals get treated as regular income? You're not on the hook for all accumulated capital gains are you?
It depends, the employer may let you stay in the 401k plan, in which case you are still limited, but you can roll the plan into an IRA, which is probably a better choice as there you can invest in whatever you want.
In a 401k or IRA, because you aren't taxed on the income going in, your tax basis is zero. There are no capital gains either: any distribution from a 401k or IRA is ordinary income. If you invest in stocks that have a lot of appreciation in a 401k or IRA, you could be hurt by putting them in the 401k or IRA as stock is tax deferred anyway and you lose the capital gain treatment.
There is a special case for 401k funds in company stock, which are eligible for capital gains treatment, but I believe that is the only exception.
Quote from: alfred russel on April 19, 2009, 07:49:50 PM
If you invest in stocks that have a lot of appreciation in a 401k or IRA, you could be hurt by putting them in the 401k or IRA as stock is tax deferred anyway and you lose the capital gain treatment.
This I don't understand. But you're still a prince.
Quote from: Admiral Yi on April 19, 2009, 07:51:55 PM
Quote from: alfred russel on April 19, 2009, 07:49:50 PM
If you invest in stocks that have a lot of appreciation in a 401k or IRA, you could be hurt by putting them in the 401k or IRA as stock is tax deferred anyway and you lose the capital gain treatment.
This I don't understand. But you're still a prince.
The real key is if your tax rate goes up. I should have added that in there.
Quote from: alfred russel on April 19, 2009, 07:29:49 PM
I was speaking to a woman at my company that has been around 10-15 years and she told me that until recently she was putting all of her 401k money into the company stock fund. The stock has performed very poorly: I'd guess she is down 50%+ of her contribution basis (maybe as high as 75%). She didn't make a very good decision, but it is still unfortunate that she was diligent saving for all those years and now isn't going to have as much as she should for retirement.
Some plans limit the percentage of the portfolio that can be put into particular, higher-risk investments. In particular, my plan restricts investment in the company stock fund to 10% of my total portfolio.
Oh, and we have 45 options.
Quote from: vonmoltke on April 19, 2009, 08:45:22 PM
Oh, and we have 45 options.
Same basic mix as Fredos?
Quote from: Admiral Yi on April 19, 2009, 09:58:25 PM
Quote from: vonmoltke on April 19, 2009, 08:45:22 PM
Oh, and we have 45 options.
Same basic mix as Fredos?
Its all mutual funds, and its a broad selection. We've got two index funds, two fixed income funds, two government bond funds, funds classified as large cap, mod cap, and small cap, about a dozen specialized funds (these are the ones with restricted investment allocations), and (since this is Fidelity) 8 Fidelity Freedom funds.
Quote from: vonmoltke on April 19, 2009, 08:45:22 PM
Some plans limit the percentage of the portfolio that can be put into particular, higher-risk investments. In particular, my plan restricts investment in the company stock fund to 10% of my total portfolio.
I don't care for nanny state restrictions. We have limits on contribution percentages, which can be really annoying if you want to max out your 401k but don't want to contribute evenly throughout the year.
Quote from: vonmoltke on April 19, 2009, 08:45:22 PM
Oh, and we have 45 options.
I glad your company provides a better 401k plan, considering you probably can't sleep at night due to all the third world deaths your work contributes to. :p
Quote from: alfred russel on April 20, 2009, 12:33:33 AM
I don't care for nanny state restrictions. We have limits on contribution percentages, which can be really annoying if you want to max out your 401k but don't want to contribute evenly throughout the year.
We technically have a contribution limit, but practically its so high (50%) you can contribute as much as you want until you hit the IRS annual limit, at which point you can keep going after-tax if you really want to.
Quote from: alfred russel on April 20, 2009, 12:33:33 AM
I glad your company provides a better 401k plan, considering you probably can't sleep at night due to all the third world deaths your work contributes to. :p
Actually, I'm losing sleep over the difficulty in offloading my condo and the debt I'm building up because of it.
You can always program a Tomahawk to "accidentally" veer off and hit your condo.
Right now, in my hand, I hold a Raytheon chip.
Does it works like the All Spark? Turns anything into a weapon?
The other way around, I think. The All Scrap.
Quote from: alfred russel on April 20, 2009, 12:33:33 AMI glad your company provides a better 401k plan, considering you probably can't sleep at night due to all the third world deaths your work contributes to. :p
Don't mess with Texas. :mad:
Quote from: Grey Fox on April 20, 2009, 06:47:15 AM
Right now, in my hand, I hold a Raytheon chip.
:yeahright:
What chip would that be? We don't really manufacture semiconductors.
Sun chip. green onion flavored.
Quote from: vonmoltke on April 20, 2009, 08:00:44 AM
Quote from: Grey Fox on April 20, 2009, 06:47:15 AM
Right now, in my hand, I hold a Raytheon chip.
:yeahright:
What chip would that be? We don't really manufacture semiconductors.
It's an old chip, atleast 6-7 years old.
Raytheon 9846NJC 2376KCC
Quote from: alfred russel on April 20, 2009, 12:33:33 AM
I don't care for nanny state restrictions. We have limits on contribution percentages, which can be really annoying if you want to max out your 401k but don't want to contribute evenly throughout the year.
I differ with you on this one. I think there should be many more nanny state restrictions, hopefully culminating in complete replacement of 401k as we know it. I have a strong feeling that many years from now, we will wonder what the hell we were thinking making people with no financial education be in charge of huge investment decisions, after it turns out that most 401k contributors have burned a lot of their wealth on misjudgments. The whole system is like a reversal of the centuries-old theory on specialization of labor.
Quote from: alfred russel on April 19, 2009, 07:49:50 PM
Quote from: Admiral Yi on April 19, 2009, 07:39:25 PM
You're a prince Fredo. Couple more questions if you're in the mood. :)
A 401k employee is stuck with those 10 choices until they leave the company? What happens then?
Also, do IRA withdrawals get treated as regular income? You're not on the hook for all accumulated capital gains are you?
It depends, the employer may let you stay in the 401k plan, in which case you are still limited, but you can roll the plan into an IRA, which is probably a better choice as there you can invest in whatever you want.
Also, if you go to work for another employer who offers a 401K plan, you can roll over into the new employer's plan.
Quote from: DGuller on April 20, 2009, 08:46:55 AM
I differ with you on this one. I think there should be many more nanny state restrictions, hopefully culminating in complete replacement of 401k as we know it. I have a strong feeling that many years from now, we will wonder what the hell we were thinking making people with no financial education be in charge of huge investment decisions, after it turns out that most 401k contributors have burned a lot of their wealth on misjudgments. The whole system is like a reversal of the centuries-old theory on specialization of labor.
I agree, but we both work in finance and presumably know what we are doing. I'd rather roll without the training wheels.
Quote from: alfred russel on April 20, 2009, 03:54:08 PM
I agree, but we both work in finance and presumably know what we are doing.
The folks approving the sub prime mortgages probably said the same thing.
Quote from: crazy canuck on April 20, 2009, 04:16:23 PM
The folks approving the sub prime mortgages probably said the same thing.
True, but then I didn't approve sub prime mortgages, so I'm probably smarter than them.
Personal investing is a weird thing. Personally, I find that the more I know, the more I realize that I don't know much at all. Often I find that most people who think they know how to invest are actually blissfully ignorant ("most" becomes "nearly all" during the boom times). Investing is an incredibly complicated field, and experience by itself can actually teach you horribly wrong lessons.
Quote from: DGuller on April 20, 2009, 04:41:57 PM
Personal investing is a weird thing. Personally, I find that the more I know, the more I realize that I don't know much at all. Often I find that most people who think they know how to invest are actually blissfully ignorant ("most" becomes "nearly all" during the boom times). Investing is an incredibly complicated field, and experience by itself can actually teach you horribly wrong lessons.
But my job is to invest.
In any event, the only "nanny state" restrictions I was complaining about were the contribution limits: I max out my 401k, and there have been times I didn't have a need for money early in the year and would have wanted to contribute all my take home pay to get that out of the way, or later in the year I wanted extra take home pay for a few paychecks but wouldn't be able to meet my contribution limit if I did so as I couldn't go over 25% on my last couple of paychecks. Is that really a high risk proposition?
Quote from: DGuller on April 20, 2009, 04:41:57 PM
Personal investing is a weird thing. Personally, I find that the more I know, the more I realize that I don't know much at all. Often I find that most people who think they know how to invest are actually blissfully ignorant ("most" becomes "nearly all" during the boom times). Investing is an incredibly complicated field, and experience by itself can actually teach you horribly wrong lessons.
Can you provide one or two examples of the incredibly complicated nature of investing that most people don't understand?
Quote from: Admiral Yi on April 20, 2009, 10:32:36 PM
Can you provide one or two examples of the incredibly complicated nature of investing that most people don't understand?
The big thing is that people very often are unaware of the risks they're taking on, or cannot comprehend it. They're exposing themselves to more market risk that they really can handle, and are also often not diversified properly. It's not surprising, risk management is complicated even for people who are trained for it, and it's not easy to train a layman for it.
And, as I said earlier, the worst thing about investment mistakes is that reasonable people can make them, and actually learn the wrong lesson. If you make the mistake above, and invest all your considerable 401k balance in one concentrated risky fund (like REIT), you may not get burned. Instead you may actually reap winfall profit for some time, if variance goes your way. You may then learn that the way to invest is to chase the big win by putting all your wealth on the line, because that's what worked for you in the past.
Quote from: DGuller on April 21, 2009, 12:20:36 PM
The big thing is that people very often are unaware of the risks they're taking on, or cannot comprehend it. They're exposing themselves to more market risk that they really can handle, and are also often not diversified properly. It's not surprising, risk management is complicated even for people who are trained for it, and it's not easy to train a layman for it.
And, as I said earlier, the worst thing about investment mistakes is that reasonable people can make them, and actually learn the wrong lesson. If you make the mistake above, and invest all your considerable 401k balance in one concentrated risky fund (like REIT), you may not get burned. Instead you may actually reap winfall profit for some time, if variance goes your way. You may then learn that the way to invest is to chase the big win by putting all your wealth on the line, because that's what worked for you in the past.
You may be right, but I think our perception of everyday investor boneheadedness might be skewed by the tendency of the media to focus only on the poor blubbering schmucks that put everything into own-company stock and got wiped out.
It would be interesting to see some stats on the percentage of 401k money held in lower risk assets.
Some 401k plans have a self-direction option. Mine does for example. You have to sign a bunch of forms but it is doable.
Quote from: Admiral Yi on April 20, 2009, 10:32:36 PM
Can you provide one or two examples of the incredibly complicated nature of investing that most people don't understand?
Here are a few:
1) Taxes
2) The effect of fees on long term returns
3) Diversification & Risk Management
4) The money needed in future years
5) The fact that your most accessible financial advisors, such as those in a bank, are pushing crappy investments like life insurance and annuities, that do not offer straightforward fees or ways to measure investment return. Television advice is a disaster.
6) Insurance
7) Debt
I don't think that many of those are especially complex, but taken together financial planning can be tricky, and a single mistake in one area can possibly sink the boat. I don't think that there is a lot of knowledge about those topics in the general population.
Quote from: alfred russel on April 22, 2009, 01:34:31 PM
I don't think that there is a lot of knowledge about those topics in the general population.
I'd go further. I think there is a lot of ruinous knowledge out there about those topics, advanced by crackpots, morons, and coin-flipping champions.
Quote from: DGuller on April 22, 2009, 01:45:00 PM
Quote from: alfred russel on April 22, 2009, 01:34:31 PM
I don't think that there is a lot of knowledge about those topics in the general population.
I'd go further. I think there is a lot of ruinous knowledge out there about those topics, advanced by crackpots, morons, and coin-flipping champions.
I agree.