> To wit, your employer, not you, chooses your 401(k) investment options and your choices may be less than optimal either because your employer doesn't know any better or because your employer's interests are different from yours.
This, for me, is the biggest issue with 401Ks - the lack of fund choices because the contributors are, in effect, a captive market. You have to change your job to change your 401K options.
This is just one aspect of a ridiculously complicated retirement saving system with separate rules for IRAs, Roth IRAs, Roth 401Ks (no idea what those are), self-employed 401Ks and who knows what else. Is it not possible the sheer complexity is a factor in turning people off retirement planning early in their career?
It also sets up a two-tier retirement and taxation system. Those lucky enough to work at employers that offer 401K plans are able to deduct $18k (and rising) from their taxes but everyone else can only deduct $5.5k (hasn't risen in the past 6 years) and a lucky few can contribute to both 401Ks and IRAs (but maybe not take deductions for both).
Don't even get me started on the backdoor IRA, 72t and all the other ludicrous shenanigans you have to go through if, by chance, you're a diligent saver who wants to stop working and access your retirement funds before turning 59.5.
Compare that to the Canadian RRSP system, where you can contribute 18% of your previous year's earnings tax-free up to a limit. And (I think) you can manage your own funds the way you want, take them to a different financial institution if you're not happy, etc.
I don't get why there have to be 401k and the various IRAs. There should be one system for all. Especially 401k is the same stupidity that employer based health insurance is. Instead of the individual choosing the best option the employer, whose interest is certainly not the same as the employee's, makes the choices.
I would think that employers would be happy if they didn't need to manage 401K plans. It would be one less thing for them to do if employees just signed up for automatic IRA deductions with payroll and provided IRA account numbers in case of employer matching.
IRA limits are $5k, 401k limit is $18k. Right now, smaller employers have higher per employee costs for administering 401k than bigger employers. I wouldn't be surprised if large employers were even compensated in some way for access to manage (collect fees) from all of the large employees' 401k funds.
I meant replace 401Ks with IRAs wholecloth and raise the limit to $18k. Is it fair that some people are allowed to save (and deduct) $18k for their retirement while others are only allowed $5.5k?
If your employer has an RRSP matching plan, any matched contributions (both your contribution and the employer matching funds) are generally tied to a specific provider with limited options, relatively high fees, etc.
But any separate contributions can be managed as you want, with some (broad) limits.
My understanding is that Canadian residents don't have the same number of low-cost index funds available to them as US residents. There's no Vanguard for individual investors, and no Schwab and Fidelity trying to compete with Vanguard's offerings.
Canadian brokers allow trading US stocks and bonds (on NASDAQ and NYSE) as well as Canadian ones (on TSX). I can buy American or Canadian Vanguard ETFs through a Canadian broker like Questrade. What I cannot do is use Vanguard as a broker, but that's a small inconvenience.
That doesn't invalidate the fact that Canadian savers have more options for what to do with their retirement savings. Largely because they're not beholden to their employers for getting a retirement savings plan in the first place.
Then there is the SEP IRA, which is an IRA with large limits but only your employer can contribute. I’m very thankful for my Fidelity SEP IRA with access to every product a taxable brokerage account would offer (except margin).
That said, while I appreciate full control and low cost, it is a lot of rope and I do wish the system was simpler and less perilous for those who want to just dump money into something reliable and take it out when they retire. Any control at all is perilous given the track record of average investors vs the performance of the funds they go in and out of.
Except that some of the economically best taxes are land-value & wealth taxes — and what are savings & investments other than wealth, often in the form of land?
I actually support LVT, as well as analogous taxes on resource extraction and other forms of rent-seeking. So if you invest in the oil and gas sector, you’d be investing in companies that will have massive tax liabilities and lower profits, which will reduce the value of their stock and the level of dividends you receive. And yeah, if you buy some land with your savings—well, that saved income turns into taxable income and then you’re on the hook for LVT as long as you keep that land.
I would think any employer paying you enough to realistically save more than $5500 would offer a 401k. That’s around 10% of the median household income, after all.
Well of course not. If I remember correctly, his advice of indexing was what he would say to his wife if he died and she needed to take over the family assets. His advice is for the 99% of individuals who don't really understand/care about researching the stock market. The other 1% are working at firms like Berkshire Hathaway.
The number of people who understand how to research and value investments is far less than 1%. And even knowing those two things doesn’t magically give you the right temperament to be able to make the right and tough choices needed to succeed at it.
> For example, as of year-end 2016 — the most recent information the Labor Department has on file — Borsheim's Fine Jewelry offered employees 71 investment options, virtually all of which (other than 10 Vanguard target date retirement funds) consisted of actively managed funds...
Wait, so they are complaining that there are only 10 vanguard low-fee funds as an option?
My last company had a 401k managed by Vanguard and I don't think it had that many Vanguard funds, not counting the target retirement ones which were all clones of each other with different glide paths.
For all intents and purposes they're the same. My Vanguard Target Retirement 401k charges 0.05% and invests in Vanguard index funds for Total Stock Market, Total International Stock Market, Total Bond Market, and Total International Bond Market. My Vanguard S&P 500 fund charges 0.04% and my Total International Stock Market charges 0.11%. (For comparison, typical actively-managed funds charge about a percent.)
In many cases you may actually pay less in fees because you can get Institutional shares instead of Individual ones.
Pretty much all of them can, assuming they have something left over for savings when they get their paychecks. There's nothing stopping them from opening an account with Charles Schwab, Fidelity, etc. and investing their savings there in whatever they like.
> There's nothing stopping them from opening an account with Charles Schwab
(I've gone through Charles Schwab's account signup) Charles Schwab, for example, has minimum amounts for opening an account; IIRC, it's $5k. There's also ~200 pages of legal agreements to wade through. (But everyone just blindly accepts those, right? So that "doesn't count" /s) It also has tax implications.
It's also not a guaranteed thing that these accounts will make money, and I wouldn't be surprised if that uncertainty affects people's decisions.
My employer (large tech company) never offered (and AFAIK still doesn't) low-ER index funds in their default 401K investment options. The best was some company-assembled "retirement fund" crap with an ER of ~1.5%. That was the best.
Luckily, after a few years, they finally enabled a brokerage account option, which allows me to purchase index funds (of the iShares type) at low ERs..
You must be lucky, because I don't think my experience is all that rare.
There are many differences between what Mr. Buffett says and does. People claim he got rich by investing. Nope ! He got rich by amassing start capital early and getting incredibly lucky making easy bets on insurance (talking people into giving him the contract in the first place, then not having to pay out). He only started doing investments after that.
Even today, there's a good reason BRK is listed under insurance, not investment.
Second problem is that he is very, very much an activist investor. He doesn't buy shares, he buys 5% and up, and sometimes controlling interests. He invests enough that he is invited to talk to senior management before he even buys and bases investment decisions on what he hears mostly. That's his investment process. Sure, there's due diligence, but nobody reading this can do that !
I don't understand that the guy's an investment guru. Investment is a hobby for him at best, and it's not investment like you or I can do.
Are you making the argument that Warren Buffet is not outstanding at investing? It’s just money made from insurance contracts and activist investing (which doesn’t count as investing)?
1) the investing he does is not something you can do (it involves a lot more than just buying/selling shares, and without enough money you can't do it). So what does it matter if he's good at it ? What he does today and what he preaches are very different.
2) When it made the real difference to his wealth he did very, very different things than he is advising others today. He got very, very, very lucky when it mattered.
The real lesson from Buffett's career is. First, work VERY hard to get to a few hundred thousand dollars, then spend a ridiculous proportion (~33%) of it to buy 3 businesses. Work very hard to make them successful. Threaten, steal, ... as necessary (this is what a hostile takeover is of course). Very, very, very hard. And he failed on one of these businesses.
Three, use this success, as all billionaires did, Bill Gross, John Bogle, Kyle Bass, George Soros and indeed Warren Buffett, to convince your friends and family (doesn't work if you weren't born rich of course) to let you manage, say $100 million or so. Now play the hostile active investor game again, and again, and again. Buy yourself into management, and force management to put short-term stock price above all else BUT you can't "betray" your investment strategy (Buffett does that by holding back in his "central" investments, like KO). (I believe "central" is what he calls them)
Now look up, and find that all those billionaires had VERY different investment strategies and you will see that it's not the investments, nor the investment strategies, but rather the fees and assets under management, that mattered. I mean investments can boost them, or slow them down, so they matter.
The investment messages:
Warren Buffett : value investing (cfr. Benjamin Graham) (Note: value investing has been shown to not match market performance, at this point for decades, but of course Buffett is already a billionaire activist investor. HE of course makes his money insuring large projects, a game only open to people with the deepest of pockets, (almost entirely) not through value investing)
Bill Gross: governments will keep cheating the public on interest rates (he defended making a bet on secular stagnation and keep adding to that bet for 25 years ... and he was right) (Again, he's changed his mind, but he's already a billionnaire)
George Soros: essentially same bet as Bill Gross. More sordid, in that he did not just wait for governments to screw up the economy but in several cases sabotaged government economic policies for profit.
Kyle Bass: Also more or less the same bet as Bill Gross, but focused on the central bet that the US housing policy was going to crash in the 2008 crisis. He's famous for being too quick on the draw, and it's cost him. He's been right very often though.
John Bogle: essentially bet that there is no signal in the market, except in obvious cases (ie. that even the very weak efficient market hypothesis is wrong and that the market moves as a whole, and you should invest with him). Never mind that if Bogle is correct then a rebalancing strategy should make much more profit than Bogle's products.
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[ 4.3 ms ] story [ 86.0 ms ] threadArticle title:
"Warren Buffett recommends investing in index funds — but many of his employees don’t have that option"
"Buffett recommends index funds — many of his employees don’t have that option"
This, for me, is the biggest issue with 401Ks - the lack of fund choices because the contributors are, in effect, a captive market. You have to change your job to change your 401K options.
This is just one aspect of a ridiculously complicated retirement saving system with separate rules for IRAs, Roth IRAs, Roth 401Ks (no idea what those are), self-employed 401Ks and who knows what else. Is it not possible the sheer complexity is a factor in turning people off retirement planning early in their career?
It also sets up a two-tier retirement and taxation system. Those lucky enough to work at employers that offer 401K plans are able to deduct $18k (and rising) from their taxes but everyone else can only deduct $5.5k (hasn't risen in the past 6 years) and a lucky few can contribute to both 401Ks and IRAs (but maybe not take deductions for both).
Don't even get me started on the backdoor IRA, 72t and all the other ludicrous shenanigans you have to go through if, by chance, you're a diligent saver who wants to stop working and access your retirement funds before turning 59.5.
Compare that to the Canadian RRSP system, where you can contribute 18% of your previous year's earnings tax-free up to a limit. And (I think) you can manage your own funds the way you want, take them to a different financial institution if you're not happy, etc.
But any separate contributions can be managed as you want, with some (broad) limits.
My understanding is that Canadian residents don't have the same number of low-cost index funds available to them as US residents. There's no Vanguard for individual investors, and no Schwab and Fidelity trying to compete with Vanguard's offerings.
That said, while I appreciate full control and low cost, it is a lot of rope and I do wish the system was simpler and less perilous for those who want to just dump money into something reliable and take it out when they retire. Any control at all is perilous given the track record of average investors vs the performance of the funds they go in and out of.
Berkshire Hathaway is a conglomerate owning a wide variety of businesses. Not every employee working there is a finance whiz.
Wait, so they are complaining that there are only 10 vanguard low-fee funds as an option?
In many cases you may actually pay less in fees because you can get Institutional shares instead of Individual ones.
(I've gone through Charles Schwab's account signup) Charles Schwab, for example, has minimum amounts for opening an account; IIRC, it's $5k. There's also ~200 pages of legal agreements to wade through. (But everyone just blindly accepts those, right? So that "doesn't count" /s) It also has tax implications.
It's also not a guaranteed thing that these accounts will make money, and I wouldn't be surprised if that uncertainty affects people's decisions.
Personally, I've never seen a 401k that lacked an index fund option. I'm sure they exist, but I highly doubt it's the norm.
One little law requiring company benefit managers to act as fiduciaries w.r.t. retirement plans would end this silliness right quick though.
Luckily, after a few years, they finally enabled a brokerage account option, which allows me to purchase index funds (of the iShares type) at low ERs..
You must be lucky, because I don't think my experience is all that rare.
Even today, there's a good reason BRK is listed under insurance, not investment.
Second problem is that he is very, very much an activist investor. He doesn't buy shares, he buys 5% and up, and sometimes controlling interests. He invests enough that he is invited to talk to senior management before he even buys and bases investment decisions on what he hears mostly. That's his investment process. Sure, there's due diligence, but nobody reading this can do that !
I don't understand that the guy's an investment guru. Investment is a hobby for him at best, and it's not investment like you or I can do.
> He only started doing investments after that.
Not really, insurance came later, he became rich with his investments when he was 30.
> very much an activist investor.
Sometimes he, sometimes he is not.
> I don't understand that the guy's an investment guru
because when the banks or big hedge funds are in trouble, Buffett is called to bail them out.
1) the investing he does is not something you can do (it involves a lot more than just buying/selling shares, and without enough money you can't do it). So what does it matter if he's good at it ? What he does today and what he preaches are very different.
2) When it made the real difference to his wealth he did very, very different things than he is advising others today. He got very, very, very lucky when it mattered.
The real lesson from Buffett's career is. First, work VERY hard to get to a few hundred thousand dollars, then spend a ridiculous proportion (~33%) of it to buy 3 businesses. Work very hard to make them successful. Threaten, steal, ... as necessary (this is what a hostile takeover is of course). Very, very, very hard. And he failed on one of these businesses.
Three, use this success, as all billionaires did, Bill Gross, John Bogle, Kyle Bass, George Soros and indeed Warren Buffett, to convince your friends and family (doesn't work if you weren't born rich of course) to let you manage, say $100 million or so. Now play the hostile active investor game again, and again, and again. Buy yourself into management, and force management to put short-term stock price above all else BUT you can't "betray" your investment strategy (Buffett does that by holding back in his "central" investments, like KO). (I believe "central" is what he calls them)
Now look up, and find that all those billionaires had VERY different investment strategies and you will see that it's not the investments, nor the investment strategies, but rather the fees and assets under management, that mattered. I mean investments can boost them, or slow them down, so they matter.
The investment messages:
Warren Buffett : value investing (cfr. Benjamin Graham) (Note: value investing has been shown to not match market performance, at this point for decades, but of course Buffett is already a billionaire activist investor. HE of course makes his money insuring large projects, a game only open to people with the deepest of pockets, (almost entirely) not through value investing)
Bill Gross: governments will keep cheating the public on interest rates (he defended making a bet on secular stagnation and keep adding to that bet for 25 years ... and he was right) (Again, he's changed his mind, but he's already a billionnaire)
George Soros: essentially same bet as Bill Gross. More sordid, in that he did not just wait for governments to screw up the economy but in several cases sabotaged government economic policies for profit.
Kyle Bass: Also more or less the same bet as Bill Gross, but focused on the central bet that the US housing policy was going to crash in the 2008 crisis. He's famous for being too quick on the draw, and it's cost him. He's been right very often though.
John Bogle: essentially bet that there is no signal in the market, except in obvious cases (ie. that even the very weak efficient market hypothesis is wrong and that the market moves as a whole, and you should invest with him). Never mind that if Bogle is correct then a rebalancing strategy should make much more profit than Bogle's products.