NCPA - National Center for Policy Analysis

401(K) MANAGEMENT OFFERS LESSONS FOR SOCIAL SECURITY REFORM

December 7, 2004

The Bush administration wants to incorporate elements of the 401(k) approach to Social Security. Yet many Americans have made mistakes in managing their 401(k) money, such as putting too much money into low-yield savings accounts or putting too much emphasis on their own company's stock, says Tom Lauricella of the Wall Street Journal.

As a general rule, younger workers should have more money invested in stock, and older workers have less in stocks and more in bonds. Yet in 2003:

  • About 38 percent of 401(k) accounts held by younger workers had no money in stock funds another 22 percent had 50 percent or less.
  • About 13 percent of workers in their 60s were exposing themselves to high risk by putting more than 90 percent of their money in stocks.

As a result, some companies are taking the investment decisions from workers, opting instead to have their investments managed by a professional investment company. There's evidence 401(k) performance has been surpassed by professionally managed pension plans.

  • For the 10 years ended in 2002, the median return on pension funds held by companies that also offered self-managed 401(k) plans averaged 6.81 percent a year compared with 6.35 percent for the 401(k) accounts.
  • As a result, over 30 years, a $100,000 investment would generate $88,000 more in a pension plan than in a 401(k) account.

Therefore, some believe that the do-it-yourself money managing of 401(k)s is not working and that safeguards must be in place for Social Security reform in order to protect less educated workers from mishandling their money.

Source: Tom Lauricella, "A Lesson for Social Security: Many Mismanage Their 401(k)s," Wall Street Journal, December 1, 2004.

For WSJ text (subscription required)

http://online.wsj.com/article/0,,SB110186973081287744-search,00.html

 

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