Really, anyone with a 401k or similar investments has benefited from this. That's a lot of middle class folks. Your parents, your grandparents, and very likely you. It's far from limited to the super-wealthy.
The 401k is an invention that is yet to prove its efficacy. The first 401ks were opened in 1978, so if you were entering the workforce then you’d be retiring this decade!
So, we will see if this privatization of pensions really benefits us all or merely enriched a generation of asset managers while absolving the corporate and the government from providing pensions for workers.
Traditional pensions are fundamentally unsustainable endeavors under modern demographics. You cannot pay decent benefits to a growing retired population while collecting reasonable dues from a shrinking working population. As we've seen, all retirement funds, even the remaining pensions, have largely switched their investments to the stock and bond markets in the vain hope that this fundamental conundrum will be solved through moonshots and financial tricks. The 401(k) is just one piece of a much bigger puzzle.
I agree with your general idea here but could it not be argued that pensions are just an abstraction on top of 401ks in the sense that if the demographics are shifting such that non-producers outweigh producers then you would expect the economy and business profits to suffer. These effects would cause broad slow growth or even reductions in business valuations, and therefore poor performance in investment accounts broadly.
Yes, and I think that describes the past few decades in Japan (among other factors).
Other options included pensioners taking a haircut and/or workers taking a paycut, neither of which is particularly palatable and still runs us into the ground eventually. Increasing corporate taxes could square the circle for a little while, but then corporations would slowly move more operations offshore, decreasing tax revenues eventually anyway. There's also the option of cutting other government expenditures, but eventually that stops working and at least some of the things that were cut can't stay un(der)funded forever.
The only other (distantly) feasible idea I can think of would be, again with an eye to Japan (of the past), near-total isolation from other countries economically, but that would have an even more substantial stagnating effect.
An S&P 500 index fund has an average annualized rate of return of about 8% over the past 50 years. It is barely beating inflation but if you can accept the risk that you might be in a -10% year at any given time instead of a +20% year then it's the best place to put your money. This is where those profits are going, and that long-term rate of return hasn't moved much.
A traditional pension fund cannot afford that kind of risk without a massive cash buffer and could not have captured that value anyway because it cannot cover its own firm's losses with some other firm's gains. After all, it's not like the same 500 companies are occupying the index as decades ago, and even those that stick there have changed relative positions a lot.
The only thing that could have conceivably replaced traditional pensions and captured all of this value and given it to the workers "fairly" without suppressing the factors that made it possible would have been a sovereign wealth fund run passively but competently by the government, but such a thing is in and of itself a moonshot.
I don't have the references on my finger tips, but basically I recall 401ks to be a bad deal for most employees because of mismanagement by the account holder, high fees, ill timed trades, etc. A few 401k (or 403b) holders have done very well, however, if their plans offered low-cost index funds, contributed regularly and avoided moving money around at the wrong time or at all.
No doubt there is a history of shenanigans in 401ks, especially early on. But if you're dollar-cost averaging into low-cost index funds, you should avoid that.
> A few 401k (or 403b) holders have done very well, however, if their plans offered low-cost index funds
I think it's more than "a few". For one thing, many 401k-equivalent funds that government employees can make contributions to are low cost index funds, and there are lots of government employees. For another thing, most 401ks offered by large corporations also offer low cost index funds, which many employees contribute to because they're usually the default that you get if you don't pick something else, and there are lots of employees of large corporations.
Low-cost index funds don't protect you from ill timed trades. I remember reading during the 2008 financial crisis that many account holders basically bailed into much more conservatively allocated funds as they watched there net worth plummet and were not able to benefit when the markets rebounded. They bought high and sold low. Most people do not have the stomach to watch their retirement savings quickly evaporate, unfortunately.
> Low-cost index funds don't protect you from ill timed trades.
Nothing can protect you from ill timed trades.
However, trades can only be ill timed if they are made. If you just pick an index fund with an appropriate time horizon for your planned retirement and then leave it alone, you don't have to worry about ill timed trades because you aren't making any trades at all.
It's a lot, but still it's only ~50% of US households[1]. So the other 50% are not benefiting at all from a rising stock market, except very indirectly (companies with happy earnings reports less likely to lay them off). And even that indirect benefit is not a given.
If the US economy keeps growing then American businesses will do well and the stock market will reflect that. It’s hard to image scenarios where the American economy shrinks while other countries have growing prosperity.
> It’s hard to image scenarios where the American economy shrinks while other countries have growing prosperity
I don't understand this viewpoint - this seems like the obvious end result of the last 50 ish years of tomfoolery.
The US doesn't make anything anymore, our economy is purely theoretical. We're lying on a huge scale and scamming, and that's how we have our economy. We gave up entire industries - and almost all of them - to foreign countries. China, Korea, Japan, Bangladesh and on and on.
Yes, these companies are "American". In name only. All the capital, all the means of production - which is the actual "economy" here - is being held by not us. We literally just gave up our means of production.
What we did then is made up a bunch of fake jobs to justify these companies in the US and to extract money from these developing countries.
It's only a matter of time before they wisen up and realize they have all the capital.
Granted, not all industries are like this. Just most.
Maybe if prices doubled over a few years, housing was out of reach, and salaries were stagnant it would be harder to buy stuff and the economy would suffer.
Not quite. This behavior leads to firing of middle-class workers. John Deere just laid off 300 workers, moved the factory to Mexico, engaged in buyback, and gave the CEO a huge pay.
So, yeah, it helps your 401k, but in the mean time you don't have a job. And if you do have a job, your salary is not increasing in line with inflation...
I recently learned that buybacks and short selling historically have not been legal, its only in recent history that they've been standard practice en large (1982 is when buybacks were legalized, I think)
It’s part of Reaganomics. Buybacks weren’t explicitly illegal beforehand though, it just wasn’t clear when they would count as stock price manipulation.
401k's are a lot like a bunch of ranchers granting their herds 0.01% of their Cattle futures portfolios.
Less hyperbolic - the existence of large pools of capital without a voice on the boards is partly responsible for the management-led short-termism mess we're in.
Only if it's still high when you go to retire. It probably will not still be high when you go to retire, because the very act of many people drawing on their stock portfolios to fund retirement will put downward pressure on stock prices.
Ironically, if you happen to have made lots of money in the stock market over the last 10-15 years, your best strategy may be to retire now, mid-career, even if you don't have enough to last the rest of your life. Basically you're arbitraging the large labor force of today to fund your time off through high stock values. Then when the market crashes, the recovery will likely be in all-new firms in all-new industries, so you reinvent yourself to capitalize on the labor shortage then. Or even better, start one of those new firms and capitalize on all the workers who need to go back to work because they can't afford their retirements.
You can't do that with a 401k, though, it'd have to be a taxable investment account that you can withdraw at will.
