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How are people dumber than us going to make out with their 401(k)s?
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Submitted by Parabolica on May 31, 2012 - 10:22pm
How well do you expect most people are going to make out with a 401(k)? How much does the average person know about investing, and how effectively will they invest their money? Is the average Joe or Jill going to be able to match or beat the results of the professionals who manage large defined benefits programs? Do they know how bond pricing works, how to allocate assets, or the difference between monetary and fiscal policy? I am skeptical.
A colleague once asked me to look at his 401(k) plan. It was riddled with fees and overpriced junk, sold to him by his 'advisor'. I explained this to him, and suggested that he might want to look at cheaper alternatives with index funds, but he lacked the knowledge (and courage) to dump his 'advisor.' This was a person in a profession with a good education, and he wasn't up to it.
To my way of looking at it,the switch from defined-benefit plans to 401(k)s are, was, for most people, like handing someone an umbrella, kicking them out of a plane at 32,000 feet, and wishing them good luck. It's worked out well for the corporations, though.
Of course here we are all smarter and more successful than that sort, and would scoff at a defined-benefit plan were it offered to us.
But what do the simple folk do?
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