Reality About 401(k)s

by Don Boudreaux on January 19, 2009

in Reality Is Not Optional

Duquesne University economist, and Mercatus Center scholar, Antony Davies has this spot-on letter in today's Wall Street Journal:

In the article "Big Slide in 401(k)s Spurs Calls for Change"
(page one, Jan. 8), 35-year-old project manager Kristine Gardner says
in response to the 44% drop in her 401(k) last year: "There's just no
guarantee that when you're ready to retire you're going to have the
money." Newsflash: Higher returns are the compensation for incurring
risk, and lower returns are the price of safety. Ms. Gardner's 401(k)
would have been completely safe had she shifted her investment
allocations into money markets. As money markets yield a paltry 1%, Ms.
Gardner's real complaint isn't that 401(k)s are unsafe, but rather that
financial markets require her to incur risk in exchange for being
compensated for incurring risk.

Retirement consultant
Robyn Credico claims that "This is the biggest test that the 401(k)
plan has seen . . . and it has failed." Au contraire, 401(k) plans have
worked exactly as designed. It is the workers (and their retirement
consultants) who have failed. There is only one reason why the average
person close to retirement should have lost 50% of his 401(k):
incompetence. Most workers at that age should have long since shifted
the bulk of their 401(k)s into bonds and money markets. The 401(k) is a
powerful investment tool but can be dangerous when abused.

If you aren't willing to
put forth the effort to learn the principles of investing, that's your
choice. But don't hobble the rest of us by asking for government
regulation of a tool that works perfectly well just so that you can be
spared the effort of figuring out how to use it.

Antony Davies, Ph.D.
Associate Professor of Economics
Duquesne University


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