401k Investing for Newbies and Nerds
There are 90 million American workers who have collectively own $14 trillion in their 401k accounts. They face both challenges and opportunities. The largest opportunity is that their accounts are investment accounts, not savings accounts, and for the past three decades, many have grown their balances in the low double digit range. Those with the highest return have constructed portfolios that focus on index funds and avoided target date funds.
The main challenge 401k owners face is that there are required to make their investment decisions by choosing from a limited menu of mutual funds. 42% of 401k participants have found that including index funds in their portfolio has provided them with results that optimize their investment experience.
The 90 million 401k account owners can be divided into 3 categories. The first are those who could care less about their money and are willing to just take what they are given. 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.
My mission is to motivate 401k participants and their employer plan providers to become engaged in their account and then train them how to optimize their results.
I have a 62-years of stock market experience. I have been a stockbroker, finance professor and individual investor. 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 14 It's Not a Tug of War When Both Sides Pull in the Same Direction
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Ninety million American workers have a company sponsored 401k retirement program. The percentage of large businesses that offer 401k plans is 98 percent, while the percentage of the small businesses that offer a 401k plan is close to 62 percent. A partial explanation for this disparity lies in the time, expense and effort small business owners must expend in order to put a plan in place and maintain it. But, over the course of the past five years, the number of small businesses offering 401k plans has grown by more than 20 percent.
There are multiple reasons why more small business owners are entering the 401k arena. First of all, small business owners want to have a retirement nest egg that is in addition to their company’s equity. Next, offering a 401k plan helps small business owners to attract quality workers that would have otherwise gone to their competitors. Last, but not least, there have been significant changes in 401k plan service providers that have significantly reduced the cost and effort required to institute and operate a 401k plan.
The Gallup organization has spent decades studying the impact that the employee’s relationship to their employer has on the growth and profitability of the business. After decades of tracking 17 million workers, Gallup concluded that there are three types of employees. The first and most desirable is the engaged employee, because they feel a connection to the firm and are passionate about what they do. The second type of employee, and the most common, is the not-engaged employee. They check-in, go to their workstation and drift through the day waiting for the closing bell to ring. The third type is the actively disengaged. These people are miserable at what they do. They have a toxic attitude toward the company, and given an opportunity, will undermine the company’s efforts.
There are many factors that lead workers to become engaged employees and access to a properly functioning 401k is high on that list. Gallop’s most research found that eighty-one percent of employees they polled said that a 401k retirement plan is an important workplace benefit. Sixty-seven percent of workers are more likely to stay with an employer that offers a 401(k).
Spending your golden years enjoying the good life starts with building a solid nest egg as soon as possible. A wise man once said, “It is not a tug of war when everybody is pulling in the same direction.” So, it behooves both the employers and employees to work together to make their 401k retirement plans both effective and efficient.