401k Investing for Newbies and Nerds
There are one hundred and thirty million American workers who collectively own $35 trillion in their 401k and related retirement accounts. The owners of these accounts face both challenges and opportunities. The largest opportunity is that their accounts are investment accounts, not savings accounts, and for the past three decades they have grown in the low double-digit range.
The main challenge 401k owners face is that there are required to make their own investment decisions by choosing from a limited menu of mutual funds.
These 130 million self-directed retirement account owners can be divided into 3 distinct categories. The first are those who could care less about their money and are willing to just let nature take its course. The second group, NEWBIES, are inexperienced in the investment process, but are willing to become engaged in the management of their hard earned dollars. The third group, NERDS, are those who have a modicum of investment expertise and are willing to devote the time and energy to expand their investments skills.
The mission of my podcast is to motivate and educate 401k NEWBIES and NERDS on how to optimize their 401k experience. I have a 62-year relationship with the stock market. I have been a stockbroker, finance professor and individual investor. Ten years ago, I appointed myself to the position of 401k guru extraordinaire. I have no investment products to sell. All I have to offer are the objective observations of one who has been there and done that.
401k Investing for Newbies and Nerds
Season 2 Episode 8 A Billion Here, A Billion THere
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During a 1963 debate on the federal budget, the Senior Senator from Illinois, Everett Dirksen proclaimed, “a billion here, a billion there, and pretty soon it starts to add up to real money.” Dirksen didn't use exact numbers, and that was not his intent. He used hyperbole to point out that the proposed level of federal spending would have significant impact on the lives of the American public.
The same thing can be said about the current state of our nation’s 401k program: “It is starting to add up to real money.” As it was in Dirkson’s case, the numbers I am about to present are not precise, but because of the massive dollar amount involved, lack of specificity does not diminish the significant role our 401k plan plays in the lives those living out their golden years.
The 401k program became the law of the land in 1978. It allows workers to place a portion of their paycheck into a tax sheltered account that will become their primary income source once they retire.
The growth of an individual 401k account has two distinct components. First, there is the additional dollars being added from the participants payroll deductions. Next is the growth of the investments selected by the account’s owner. The program requires the account owner to decide how the assets of the account are invested, but their choices are limited to a small number of mutual funds provided by their plan administrator.
When we entered the twenty-fist century the total value of the 401k program was $1.7 trillion. During the years from 2000 to 2026, the S&P 500 index grew 4 and a half times. Sevent-six percent of all 401k accounts contain equity mutual funds and as we entered 2026 the total value of the 401k assets exceeded $14 trillion.
It is impossible to calculate what percent of this impressive growth in 401k assets can be attributed to payroll deductions and how much to invest gain. But let’s assume that the gain from the investment portion is a meager 25 percent of the total. That translates to $3.5 trillion added to workers retirement accounts due to prudent investing.