What Are We Doing To Our Young Investors?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

What Are We Doing To Our Young Investors?

Post by pkcrafter »

Article by Rob Arnott & Lillian Wu, Oct, 2014
A recent Fidelity (2014) study reports that, among 12.5 million DC [defined contribution] participants, 41% of those between ages of 20 and 39 cashed out part or all of their DC assets when switching jobs, incurring tax penalties along the way. A rhetorical question: Do they lose their jobs more often in a bull or a bear market? Maybe a high-risk profile is unwise for young savers.
Perhaps young workers should not invest in TDFs [target date funds] with high equity allocations at all until their starter portfolio reaches a certain minimum balance of, perhaps, six months’ income.
What are we Doing To Our Young Investors
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Easy Rhino
Posts: 3278
Joined: Sun Aug 05, 2007 11:13 am
Location: San Diego

Re: What Are We Doing To Our Young Investors?

Post by Easy Rhino »

this started off weak, got better, and then lost me near the conclusions again.

I kind of like the concept of investing in a conservative 'starter portfolio' until six months salary has been saved.

However, what I don't like is the assumption that the 401k is the right place to save this emergency savings.
kazper
Posts: 628
Joined: Fri Aug 01, 2014 7:45 pm

Re: What Are We Doing To Our Young Investors?

Post by kazper »

A little anecdote, when I started my current job, fed employee, all of my money was being placed in the g fund. I was roughly 24 at the time. Why it defaulted to the g fund is beyond me, but much like a lot of young investors I didn't know better and didn't care to...
targ
Posts: 139
Joined: Tue Nov 12, 2013 8:23 am

Re: What Are We Doing To Our Young Investors?

Post by targ »

The glaring fundamental flaw is that the tweenies somehow thing it's ok to cash out in the first place just because of a job change. If they don't have the wherewithal to understand that, they don't need to be investing in the first place until they learn a bit more.

The problem is not that we are "doing something" to young investors, it's that we're *not* teaching them to get their basic financial house in order (get out of stupid debt, build an emergency fund, live below your means, get off the check-to-check mentality, etc.) prior to investing.
The capacity to learn is a gift; The ability to learn is a skill; The willingness to learn is a choice. | -REBEC OF GINAZ
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: What Are We Doing To Our Young Investors?

Post by Grt2bOutdoors »

"We" are teaching them to live to the limit, take a jump over the cliff even though statistics bear out the grim truth - those who take un-necessary risk will pay the price. There is prudent risk taking and then there is absolute foolishness. Guess which bucket industry is in?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: What Are We Doing To Our Young Investors?

Post by pkcrafter »

The high rate of taxable withdrawals with penalty is surprising to us, but it would seem to be a direct reflection of the very poor job that's being done on financial education. Of course part of it has to be a lack of interest on the part of plan contributors--I hesitate to call them investors. Good information is out there, but you have to want to read it. Stupid is as stupid does.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
thenextguy
Posts: 717
Joined: Wed Mar 25, 2009 12:58 am

Re: What Are We Doing To Our Young Investors?

Post by thenextguy »

targ wrote:The glaring fundamental flaw is that the tweenies somehow thing it's ok to cash out in the first place just because of a job change. If they don't have the wherewithal to understand that, they don't need to be investing in the first place until they learn a bit more.
We don't know the circumstances of the withdrawals. It could be that they need the money to make ends meet. I would recommend making withdrawals from retirement accounts if the alternative is being homeless.

Keep in mind the study is referencing defined contributions, so it's not as if they were intentionally saving for retirement. When I was in my early 20s, I was living paycheck-to-paycheck. With student loans as bad as they are now, I imagine things are even worse for today's youngsters.
anonforthis
Posts: 414
Joined: Sat Oct 19, 2013 1:45 pm

Re: What Are We Doing To Our Young Investors?

Post by anonforthis »

My gosh, I wish I could go back in time. I cashed out 401ks twice when I was from 16 to 22. Not because I needed the money I just did not know better. My little brother is 22 and working for a very famous tech company in Silicon Valley. I told him about my mistake and he listened. He already has 100k+ in his retirement. He is a hard worker and a lot smarter than me for sure. I am so proud of him.
User avatar
oneleaf
Posts: 2562
Joined: Mon Feb 19, 2007 4:48 pm

Re: What Are We Doing To Our Young Investors?

Post by oneleaf »

Are there often forced cashout provisions for small balances? I remember that in some of the 401k plans I saw. That may be a big part of the problem.
User avatar
backpacker
Posts: 1620
Joined: Mon Sep 22, 2014 2:17 pm

Re: What Are We Doing To Our Young Investors?

Post by backpacker »

The Fidelity study cited by Research Affiliates notes that withdrawal rates have remained "constant" over the past five years even though markets are up and unemployment down. A rhetorical question: Are young investors with "too much" in equities withdrawing money because they have jobs and don't like seeing their investments go up?
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: What Are We Doing To Our Young Investors?

Post by Grt2bOutdoors »

Three cheers for the "I need it now, I want it now" society, NOT! :annoyed
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
jofij
Posts: 4
Joined: Tue Mar 27, 2012 12:25 pm

Re: What Are We Doing To Our Young Investors?

Post by jofij »

I was so angry upon reading this "advice" that I decided to write my own blog post in response:

http://jofijoseph.weebly.com/jofi-josep ... ngs-advice

Arnott appears perplexed over the fundamental purpose of 401(k) accounts. Hint: they're not supposed to be your rainy day fund.

I welcome any thoughts you may have.

Jofi Joseph
Topic Author
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: What Are We Doing To Our Young Investors?

Post by pkcrafter »

jofij wrote:I was so angry upon reading this "advice" that I decided to write my own blog post in response:

http://jofijoseph.weebly.com/jofi-josep ... ngs-advice

Arnott appears perplexed over the fundamental purpose of 401(k) accounts. Hint: they're not supposed to be your rainy day fund.

I welcome any thoughts you may have.

Jofi Joseph
Well, you're right. As Easy Rhino said, the article appears to make sense in the middle where a starter fund is suggested. I assumed this would be a separate account, but the authors at the end make it clear the starter portfolio is in the dc plan. I think they are trying to say that new investors should start with a less risky portfolio until they get used to volatility and risk. In other words, the starter portfolio is not really an emergency fund, it's just a starter fund. The problem occurs when they also call the starter portfolio a rainy day portfolio. Having said all this, I really wonder if these investors are removing money because of downturns or just because they needed some money and didn't have any other funds--nothing for short term goals, nothing for emergencies.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: What Are We Doing To Our Young Investors?

Post by avalpert »

pkcrafter wrote: Having said all this, I really wonder if these investors are removing money because of downturns or just because they needed some money and didn't have any other funds--nothing for short term goals, nothing for emergencies.
Or because they assumed it was part of severing ties with their previous employer and aren't aware of the possibility or benefits of rolling it into an IRA.
User avatar
Meg77
Posts: 2835
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX

Re: What Are We Doing To Our Young Investors?

Post by Meg77 »

I read this article yesterday and it does make some sense. I'm in my 30s and have had several friends cash out 401ks or take out big loans in order to make a home purchase, pay off debt or pay bills after a job loss. Sure it's not what you're "supposed" to do with 401k funds, but like it or not most people end up in the situation of having retirement funds and not much else in liquidity at least at some point in their lives. It might be a bit of a bad premise to expect the general masses to a) accumulate 401k funds and b) never touch them for decades even when they really want or need money and don't have any.

More interestingly though, this "problem" sort of proves to me that 401ks work. In other words, invisible and relatively painless, automated savings plans that take money straight from your paycheck before you even see it WORK. Like paying taxes - imagine saving up for your annual tax bill if there was no withholding! Sure maybe most of us on this forum could and would do it, but the average American? Maybe we could add a few other options to payroll deductions - like a home purchase fund or education savings plan. I know even I have trouble saving for vague long term goals out of my own checking account when there isn't a specific sheltered off-limits bucket for that purpose.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Topic Author
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: What Are We Doing To Our Young Investors?

Post by pkcrafter »

avalpert wrote:
pkcrafter wrote: Having said all this, I really wonder if these investors are removing money because of downturns or just because they needed some money and didn't have any other funds--nothing for short term goals, nothing for emergencies.
Or because they assumed it was part of severing ties with their previous employer and aren't aware of the possibility or benefits of rolling it into an IRA.
Yes, that too. It's really surprising how little help some companies provide employees on 401k rules and procedures.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
sls239
Posts: 1208
Joined: Thu Oct 23, 2008 4:04 pm

Re: What Are We Doing To Our Young Investors?

Post by sls239 »

I can agree that the automatic enrollment option should probably not be a TR fund, but rather something more like a balanced fund.

Just because these funds are marketed towards people of a certain age, that doesn't mean that they are appropriate for someone because they are that age.
avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: What Are We Doing To Our Young Investors?

Post by avalpert »

sls239 wrote:I can agree that the automatic enrollment option should probably not be a TR fund, but rather something more like a balanced fund.

Just because these funds are marketed towards people of a certain age, that doesn't mean that they are appropriate for someone because they are that age.
How does a single balanced fund alleviate that issue?
thenextguy
Posts: 717
Joined: Wed Mar 25, 2009 12:58 am

Re: What Are We Doing To Our Young Investors?

Post by thenextguy »

avalpert wrote:
sls239 wrote:I can agree that the automatic enrollment option should probably not be a TR fund, but rather something more like a balanced fund.

Just because these funds are marketed towards people of a certain age, that doesn't mean that they are appropriate for someone because they are that age.
How does a single balanced fund alleviate that issue?
Read the Conclusion section of the article.
sls239
Posts: 1208
Joined: Thu Oct 23, 2008 4:04 pm

Re: What Are We Doing To Our Young Investors?

Post by sls239 »

It eliminates the illusion that what is automatically chosen will be specifically appropriate for that person.

TR funds imply they are appropriate for people in that age range. Balanced fund makes no such claim.

Also, if you take this fact from the article as true
With growing use of automatic enrollment in 401(k) plans, and the prevalence of TDFs as the default choice in defined contribution (DC) plans, we’re seeing an ever-higher equity concentration in young workers’ DC portfolios.
then you are left with the implication that what is being chosen for young people is more aggressive than what they would chose for themselves.
User avatar
abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: What Are We Doing To Our Young Investors?

Post by abuss368 »

This is really interesting and unfortunate.

Spreading the Boglehead message one investor at a time can continue to make a difference!
John C. Bogle: “Simplicity is the master key to financial success."
avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: What Are We Doing To Our Young Investors?

Post by avalpert »

thenextguy wrote:
avalpert wrote:
sls239 wrote:I can agree that the automatic enrollment option should probably not be a TR fund, but rather something more like a balanced fund.

Just because these funds are marketed towards people of a certain age, that doesn't mean that they are appropriate for someone because they are that age.
How does a single balanced fund alleviate that issue?
Read the Conclusion section of the article.
Where in the conclusion does it say that the particular balance of a balanced fund is appropriate for every investor?
avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: What Are We Doing To Our Young Investors?

Post by avalpert »

sls239 wrote:It eliminates the illusion that what is automatically chosen will be specifically appropriate for that person.

TR funds imply they are appropriate for people in that age range. Balanced fund makes no such claim.
But 'default investment' provides the same illusion - at least based on the research that regardless of the default investment most people don't change it. So I am no sure we have any basis for thinking that a balanced fund would make them more likely to figure out what is right for them than TR.

Also, if you take this fact from the article as true
With growing use of automatic enrollment in 401(k) plans, and the prevalence of TDFs as the default choice in defined contribution (DC) plans, we’re seeing an ever-higher equity concentration in young workers’ DC portfolios.
then you are left with the implication that what is being chosen for young people is more aggressive than what they would chose for themselves.
I don't see how that implication follows from the assertion that we are seeing ever higher equity concentrations. What they had before was no more chosen by themselves than now, it just so happens that instead of defaulting into a money market they are defaulting into a fund that has equities so yes they have ever higher equity concentration - that tells us nothing about what they would choose for themselves and even less (well, I guess equally as little) about what they should choose for themselves.
montanagirl
Posts: 1805
Joined: Thu Nov 19, 2009 3:55 pm
Location: Montana

Re: What Are We Doing To Our Young Investors?

Post by montanagirl »

I actually heard recently from some HR people that it is common for workers to serially quit just to get at their 401k balances. Then they hire back on with the same company or go somewhere else. Apparently some employers are accommodating, trying to keep a full and happy crew on board.
TheSuperHappy1
Posts: 5
Joined: Wed Oct 22, 2014 8:24 pm

Re: What Are We Doing To Our Young Investors?

Post by TheSuperHappy1 »

Many 401k providers don't make it easy to transfer your assets to an IRA.

In many cases I know of, it was much easier to withdraw everything. You then have 60 days to deposit the whole amount into an IRA, and then there are no tax penalties
MoneyIsntEverything
Posts: 166
Joined: Sat Sep 13, 2014 9:43 pm

Re: What Are We Doing To Our Young Investors?

Post by MoneyIsntEverything »

Deleted
Last edited by MoneyIsntEverything on Wed May 17, 2017 5:02 pm, edited 1 time in total.
Wiki
mortal
Posts: 497
Joined: Mon Sep 15, 2008 11:15 pm

Re: What Are We Doing To Our Young Investors?

Post by mortal »

I remember when I was doing a coop internship with the navy. The fed HR lady was a bit surprised that I even wanted to participate in the TSP. When the coop ended, I elected to leave my tiny balance there instead of roll it to an IRA.

I later learned that the TSP was basically one of the best 401ks you could hope for, and I've rolled money *into* it at every opportunity ever since. I wish I could go back in time and buy my 23 year old self a beer. :sharebeer
placeholder
Posts: 8421
Joined: Tue Aug 06, 2013 12:43 pm

Re: What Are We Doing To Our Young Investors?

Post by placeholder »

TheSuperHappy1 wrote:Many 401k providers don't make it easy to transfer your assets to an IRA.

In many cases I know of, it was much easier to withdraw everything. You then have 60 days to deposit the whole amount into an IRA, and then there are no tax penalties
If you do that then there is mandatory 20% tax withholding meaning you would have to make up that deficit out of external sources at rollover or it will be treated as a distribution subject to tax and potentially penalty but all plans are required to provide a means for direct rollover so I don't know what you mean by "don't make it easy to transfer".
User avatar
NightOwl
Posts: 664
Joined: Fri Feb 06, 2009 1:08 am
Location: New York, NY

Re: What Are We Doing To Our Young Investors?

Post by NightOwl »

pkcrafter wrote:
avalpert wrote:
pkcrafter wrote: Having said all this, I really wonder if these investors are removing money because of downturns or just because they needed some money and didn't have any other funds--nothing for short term goals, nothing for emergencies.
Or because they assumed it was part of severing ties with their previous employer and aren't aware of the possibility or benefits of rolling it into an IRA.
Yes, that too. It's really surprising how little help some companies provide employees on 401k rules and procedures.

Paul
I was asked to serve on my company's 401k committee by virtue of being the only employee who has ever requested the plan documents. My reward was to be told essentially never to tell a fellow employee anything about the plan -- I need to send employees with questions to HR, who sends them to Fidelity, and of course by that point the person has lost interest in the simple piece of information that he or she wanted.

That said, this article reminds me, yet again, of one possible counterargument to the "low returns going forward" argument, and that is that there just aren't that many people interested in being long-term investors, so in theory, those who are interested should continue to be able to demand risk premiums on that invested money. A period of flat returns will further discourage the vast majority of people from investing -- why not pay down the mortgage, or simply spend the money?

I work with fairly sophisticated people. Yet from the broad overview I get of our company's plan, I know that many of my co-workers don't invest in the 401k, many have never left the default money market fund, and I myself own a notable percentage of the total amount invested in bonds across the entire plan. I have told a few co-workers about the Backdoor Roth IRA, and they have then had to educate their CPAs and tax preparers about the procedure before they can implement it. It's a sad state of affairs.

Like one poster above, I'm happy to have been able to help out my younger brother, who is socking away money in his 401k and Roth at age 22 -- he's going to be in great shape when he's my age.

NightOwl
"Volatility provokes the constant dread that some investors know more than we do, making us fearful of ignoring such powerful price movements." | Peter Bernstein, "The 60/40 Solution."
User avatar
tyrion
Posts: 1423
Joined: Fri Feb 08, 2008 2:33 pm

Re: What Are We Doing To Our Young Investors?

Post by tyrion »

oneleaf wrote:Are there often forced cashout provisions for small balances? I remember that in some of the 401k plans I saw. That may be a big part of the problem.
I believe my company will cash you out automatically if your balance is less than $3500. Assuming someone is only there a short time or elects for a low percentage, this could be a big chunk of the withdrawls. Young people moving from job to job trying to find a nice fit.
Post Reply