401(k) accounts are typically among the largest assets held by middle- and upper-middle-income households in the United States. So naturally they draw a lot of attention—in the marketplace, in the media, and in Washington. The government, for example, is proposing new rules on reporting fees and promoting impartiality in investment advice.
I’ve mentioned in several previous posts that the anxiety about 401(k) balances has been largely overstated, in part because of the beneficial effects of ongoing contributions and diversified portfolios. This point has come across as Pollyanna-ish to some of you, a point that I can sympathize with, even though I largely disagree with it.
However, I am no Pollyanna about retirement risks, and want to spend a moment discussing what I view as the most important real risk embedded in your retirement savings account: the possible toxic combination of unemployment and market losses.
I elicited some grief from certain Vanguard Blog readers by talking about a recovery in 401(k) accounts earlier this year. Allow me to provide an update on the issue.
Recall my basic premise: As a result of ongoing contributions, as well as portfolio diversification, the wealth level of many 401(k) participants had not fallen as dramatically as commonly perceived. In fact, some workers had experienced growing 401(k) account balances even during falling markets. These were, admittedly, mostly employees starting out their savings careers, where contributions are large relative to balances.
I’m a little tired of reading about how “buy and hold” is dead, and diversification doesn’t work, and how “target-date funds don’t work,” and that there was too much risk, especially for pre-retirees, in these balanced funds. These stories seem to continue regardless of what’s going on in the real world.
So I won’t discuss much. Instead, here’s some math.
There are only two reasons you appear on the cover of Time magazine—either you are receiving plaudits from the media, or you’re about to be tarred and feathered. 401(k)s are featured on the cover of Time this week, and it’s not because they’ve been named “plan of the year.”
