It’s Not 529’s (Or 401k’s) Fault

Ever since I switched from reading Financial Times to Wall Street Journal (FT subscription ran out; no option to use airline miles), I started encountering more and more sob stories.

On Tuesday I mentioned the story about laid-off employees burning through their severance and turning down job offers. On Wednesday I read this article about people stopping using 529 plans because of market losses:

“in the wake of last year’s market collapse and some high-profile fund blowups, some investors — and financial advisers — are paring back their reliance on 529 plans and in some cases are considering alternatives.”

The article goes on to say people are investing in muni bonds, real estate, and fixed indexed annuities outside of the 529 plans instead.

To which I have to say “It’s not 529’s fault!” A few weeks back, there was an article on Times magazine about how 401k plan is bad and should be abolished. I didn’t have time to comment on it back then. Now I just want to say “It’s not 401k’s fault!”

A 529 plan or a 401k plan is a container. Whether you make money or lose money depends on what you put in them. A plan is not an investment. When our mainstream media don’t make this basic difference clear, no wonder the public is confused.

I also wonder if people came up with the ideas for muni bonds, real estate, and fixed indexed annuities on their own, or they were sold by some financial advisers. I suspect it’s the latter.

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  1. phej says

    Conventional wisdom says that the journalistic side of WSJ is “liberal.” I don’t know how much that has changed since News Corp bought them. Which seems to be better the Financial Times or WSJ? I subscribe to the WSJ and the Economist (which is partially owned by FT, from what I remember) and I’m considering dropping one. I’m leaning towards the WSJ because ever since the News Corp buyout, it feels like there’s more fluff.

  2. Mike Piper says

    Agreed completely. The problem isn’t the account structure. The problem is the lack of investor knowledge and the poor investment options. It’s mind boggling that this isn’t obvious.

    On another note, regarding your last paragraph, it seems noteworthy that you can look at a person’s portfolio, and without any further information, have a pretty good idea of where they get their financial advice.

  3. edward says

    But, the poor investment options are part of the container. Investor knowledge is not an addressable issue, but until we get truly portable 401k’s, like an IRA, we are stuck with the limited choices made by our employer, and the fee gouging that goes with it. Participating in a 401k makes you a captive investor, the rest follows. My only fixed income choice just broke the buck, but Hewitt never said it that way. Reserved the term for more sophisticated investors, no doubt.

  4. Harry Sit says

    edward – Limited investment options can be a problem, but there are more than 100 529 plans, each with several investment options from conservative to aggressive. If someone wants a low cost, conservative option, they can do that in a 529 plan. High fees in 401k plans is a problem, although large investment losses or not having enough balance are usually caused by improper asset allocation or inadequate contributions.

  5. Harry Sit says

    phej – WSJ with its root in the U.S. has more content relevant to the U.S. retail investors, but that’s also where it gets wrong. FT and Economist are more macro-oriented and more focused on global/international. I don’t recall reading a single sob story in FT. The sob stories in WSJ are almost formulaic: so-and-so did this and lost money because of evil banks (or someone else), a quote from one expert, a quote from another. If there’s an option to subscribe to FT with airline miles, I would go back to FT any day.

  6. Curtis Frazier says

    401k plan are great, but the buy and hold mentality has got to stop. When the market was melting down last year, I moved all our investments to cash in the 401k plans. After the carnage was over, I slowly started to move things back over. Here’s a good rule of thumb. Anytime the market is crashing and you see folks on the Today Show and other shows telling you everything is fine, think long term. That’s when you move your stuff to cash or cash equivlance. Funny how nobody tells you to think long term in the market is going up.

    We knew things were bad last year, it was no secret, you can’t just sit there and watch your hard earning savings just drop in value and then follow the practice of not opening your statements because you are afraid to do so.

    One more thing, I moved my balances to cash, but kept my existing contriubtions going to stocks since I was getting them at depressed values. I’m sure the next question will be how do you know when to get back in? I follow the Investor’s Business Daily. After we go through a follow through day which takes us to a confirmed rally, it’s time to start rolling the cash back into the stock plans. Just see the Big Picture section. You’ll learn a lot even if you just do mutual funds.

    The whole idea that you can’t time the market is bogus. People who say that just haven’t taken the time or effort to learn. Everything you do in life is based on timing.

  7. Mike Piper says

    “One more thing, I moved my balances to cash, but kept my existing contributions going to stocks since I was getting them at depressed values.”

    How does that make any sense?

  8. Curtis Frazier says

    “One more thing, I moved my balances to cash, but kept my existing contributions going to stocks since I was getting them at depressed values.”

    How does that make any sense?

    Because I am picking up more shares of the funds at depressed values. Eventually, we know the market will rebound (I see no need for the entire portfolio take the ride down though) so my new money will ready be there which is a very small percentage of the entire portolfio balance anyway and I’m getting them cheaper anyway. If the market continues down, I’m dollar cost averaging down with a small percentage of the portfolio.

    Let’s say you have $50,000 portfolio. And you are contributing $400 month. Assume you moved the $50,000 to cash back this past summer. You are now doing $400/month in stocks as the stocks go down, you really aren’t hurting that much since your $50,000 is earning about 3% and your $400/month is not hurting the portfolio by dropping since even after 6 months of only about 4% of your portfolio. By the time March came around, we are buying boatloads of shares with our $400 monthly contribution and really bringing down our cost average while our $50,000 cash just generates daily interest payments offsetting any losses. If the market was to rebound in an instant, you would get the gains on the $400/month investments and still get the 3% on the cash while we wait for a confirmed rally to ensue again.

  9. Mike Piper says

    But if you’re so sure you can pick the bottom, why not put everything (including contributions) in cash until that point arrives?

  10. Casper says

    We continue to blast into the 529.. With 8 years until the first needs to start using and 10 for the second we are much less concerned with the ups and downs ove the overall market than the taxes when we get there.

  11. Celtic86 says

    Mike Piper, don’t fixate on the trite. The bs about riding out the down markets is just that. The talking heads tell the suckers to stay in while the funds sell. I dumped everything my wife and I had saved our entire lives (that was in the market) on September 15. I bought back in about 4 days after the bottom in March. How did I know? I didn’t. It just seemed to me that the rest of the downside risk wasn’t that scary since I’d sold when the S&P 500 was trading at 1100 and was looking at buying back in at 640.

    I think that’s more of the point of Curtis’ post – don’t be a lemming.

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