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.
Given all the back and forth in Washington these days, with policy meetings and dramatic proposals to revolutionize retirement, I’ve got retirement-income solutions on the brain. So here’s a modest proposal for providing “Retirement Income Security for All.”
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.
The issues aren’t quite the same as those one faces when considering the deepest aspects of personal faith and religious doctrine, but a “Roth conversion” can pose some difficult issues for investors nonetheless. And we’re going to hear much more about this going forward because of a scheduled change in the law: Unless something unexpected happens in D.C., come 2010 there will no longer be income limits on Roth IRA conversions.
There will be a lot written on the issue of whether one should convert or not, as well as endless articles describing all kinds of “strategies” to potentially leverage the change (some legitimate and others more questionable). For me, three things are important in considering this kind of “conversion”:
