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Under the Australian system we choose the type of investment. In the fund I am in, these range from capital stable to high growth, which are defined as a mix of cash, bonds, Australian shares, international shares, investment property. Dependent on the mix I can choose what level of growth and risk I want. I think I can even choose my own mix. The organisation that runs the fund decides on what shares etc. One suggestion is to have investments that are linked to share market indices plus dividends, for which the management costs would be lower. It all works fairly nicely, except that I don't have enough yet to retire. Our university system is becoming a bad place to work.


Some comments:

1. "Little pockets". Little pockets are fine so long as your expenses don't go up as a percentage. It's the expenses that are a mess with 401k's, depending on how much your employer looks out for your interests.

Fees are deadly: http://wallstreetonparade.com/2013/04/pbs-drops-another-bombshell-wall-street-is-gobbling-up-two-thirds-of-your-401k/ shows with a 2% fee structure two thirds of the money ends up with the management firm, not you. This is simple math, and anyone with Excel can verify Bogle's calculation. There's also no reason for 401k fees to be high, since there's no investment advise being given and the funds used are typically large ones. There are several core Vanguard funds with expense ratios in the .05% to .15% range.

2."Average Joe". The average Joe typically gets into trouble by buying on history (i.e. buy after the market has gone up, sell when it goes down). Other than that, there's not a lot of evidence that professionals do better for the average investor (because of the fees you pay). Take a look at the "Morningstar" experience in Bogle's famous "buy the haystack" article: http://www.vanguard.com/bogle_site/bogle_speechesequity.html

3. "Risk shift". No argument there.

4. "Regressive". Not sure regressive is the right term, but it's definitely true that for high income individuals the 401k is likely to be a smaller piece of their total savings, and so they bear less risk. If they bear less risk, lower income individuals bear more.

It certainly is true that loan utilization rates vary, and tend to be used more "for participants in their 40s, those with 10 to 20 years of tenure, those earning $40,000 to $60,000 per year, and those with plan balances between $20,000 and $30,000. For those who have a loan, the loan-balance-to-401(k)-balance ratio declines with age, tenure, compensation, and 401(k) plan balance." http://www.nber.org/papers/w17118

BUT: is this situation better than having a defined benefit plan (such as the Illinois public employee pensions, which are even guaranteed in the Illinois constitution) which the employer (the state) does not fund and now wants to partially renege on?

David J. Littleboy

You asked:
"Second, how many of us can truly beat investment professionals at the investment game?"

The answer is: every single one of us. Just buy an index fund and you just beat the pants off the vast majority of investment professionals. Of course, on one does that. Not even me (I refuse to own stocks).

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