Kicking and screaming with the 401k retirement plan

Mas­sive Outflows

As some of you that know me, I have always been 401k/mutual fund averse. Which pretty much means I’ve com­pletely avoided it, and didn’t even have one. In the past, we’ve gone in and out of the mar­ket. But mostly because of the calamity in the last few years, we have been on the sidelines.

Things have changed. We have a “com­fort­able plan” some­what in place now, but we were miss­ing the “safe plan”.

I’m still com­pletely dis­gusted with the 401k/mutual fund indus­try. Just take a look here, here, here, here, and here. And if those aren’t enough, just search for “mutual fund out­flow” — there is a heck of a lot of it out there right now.

Shame­lessly stolen from Google images — can’t find author

But why?

First I’ll con­tem­plate on why there is so much money pour­ing out. Here are some of my rea­sons, most of these are obvi­ous to many people.

• Unem­ploy­ment is crush­ing this econ­omy. What do you think a indi­vid­ual who has to pay his rent will do with­out any cash left to his name, but a chubby retire­ment fund he can tap? Do you hon­estly think they will rea­son with them­selves whether they should leave the nest egg or pay the penal­ties? I don’t think so.
• Con­fi­dence isn’t down, it’s non-existent. I sus­pect many peo­ple have cut down or elim­i­nated con­tri­bu­tions after see­ing their funds slashed in half over the past cou­ple of years.
• I think the pub­lic may pos­si­bly be start­ing to see the fal­lacy of this Employee Retire­ment Income Secu­rity Act (ERISA) of 1974. Just like the 16th Amend­ment which made taxes legal in 1913, but wasn’t preva­lent until 1943. It seems it takes about 30 years to see the con­se­quences of a big deci­sion. If that is the case, what will our off­spring see in 2040? Will the con­se­quences of our spend­thrift gov­ern­ment be obvi­ous then? What pro­por­tion of bailouts will we see then?

There is prob­a­bly a mil­lion rea­sons out there why there is such a huge shake up. Here is a quote from Zero Hedge on this post:

Over­all, sell­ing by S&P500 insid­ers was 8,279.5x times greater than buy­ing (per Bloomberg). There were 5 insider buys for a total of $150,673, and 117 sales for a total of $1,247,500,249. There is no point to even dis­cuss what this data point indicates.

I don’t know about you, but when you have more peo­ple sell­ing than buy­ing, it’s pretty obvi­ous where this is heading.

Am I crazy?

Maybe.

My rea­son­ing behind why Kim and I are enrolling in our employers 401k:

• Buy low sell high. That might not apply to this mar­ket con­di­tion yet, but this car­di­nal rule is con­stantly bro­ken by unin­formed investors. Just like we started buy­ing real estate last year as the fire was engulf­ing the indus­try, and every­one was run­ning from the flames — we were run­ning into the flames. This has served us well.
• We have an exit. Hard to believe with a retire­ment plan that you need an exit. Yes, I totally believe you do. The say­ing “invest long term, and park your money” is not invest­ment advice, it’s a sales pitch. A big prank pulled by the finan­cial indus­try on the Amer­i­can peo­ple. Our long term plan once we no longer have to be employed is to roll over the 401k into a Roth IRA, prefer­ably self-directed so we can have much more con­trol. Which will also get hooked up to our cor­po­ra­tions, so that we can uti­lize pre-taxed busi­ness income to max out our contributions.
• Free money — kind of. We are doing the bare min­i­mum to max­i­mize the match­ing. Our employer matches 2.5% for our 5%, which gives us a con­tri­bu­tion of 7.5%. The only prob­lem is some of that will get wiped out when we con­vert to Roth since we have to pay taxes when we con­vert. Oh well, it could be worse.

Our Con­tri­bu­tion Breakdown

Our break­down as far as con­tri­bu­tion is as follows:

• 30% Large Cap
• 30% Mid-Cap
• 30% Small Cap
• 10% Income (bonds)

We will see how this works out.

Fore­sight

I think there might be a pretty good cor­rec­tion before we see an improve­ment. There is also a big loom­ing prob­lem if the baby boomers — whom, I sus­pect, will behave sim­i­larly with the mas­sive out­flows. They won’t sys­tem­at­i­cally tap their required dis­tri­b­u­tions, they will sim­ply kill the golden goose. Peo­ple just don’t behave ratio­nally when it comes to money. Emo­tion trumps logic. I don’t care what any­one says, this will most likely happen.

There has also been a lit­tle con­cern over ETF’s (exchange traded funds) on my part. The logic behind ETF is that the more peo­ple buy, the more the fund buys. Gold being a good exam­ple right now, ETF’s are on fire. The more peo­ple buy the paper asset, the more the fund has to buy the phys­i­cal assets to back the paper assets. Guess what hap­pens when folks bid up gold, and the fund has to find the phys­i­cal asset to back those inflows? The funds bid up the prices. It’s vicious cycle. Can we say gold bub­ble looming?

Now what?

We are prob­a­bly going to open a Roth IRA on the side, regard­less if we have these 401k’s. Our goal is to put away at least 50% of our monthly income into retire­ment, sav­ings, and invest­ments. It should be very much doable real soon. I will con­tinue to shy away from the paper mar­ket aside from what I men­tioned above, prob­a­bly well into this decade. We shall see.