Thursday, January 08, 2009

Nobody Could Have Predicted

There are some decent reasons for favoring defined contribution plans over defined benefit ones, but the idea that we're all expert investors who want to spend time managing our vast portfolios is absurd as the idea that we should become medical experts who make decisions about which health care treatments we need to receive.

"This is the biggest test that the 401(k) plan has seen to date, and it has failed," says Robyn Credico, head of defined-contribution consulting at Watson Wyatt Worldwide, noting that many baby boomers are ready to retire. "We've put people close to retirement in a very challenging position."

The most obvious pitfall is that 401(k) plans shift all retirement-planning risks -- not saving enough, making poor investment choices, outliving savings -- to untrained individuals, who often don't have the time, inclination or know-how to manage them. But even when workers make good choices, a market meltdown near the end of their working careers can still blow their savings to smithereens.

The "smart" advice for people nearing retirement is that they pull most of their money out of riskier investments (stocks) and shift it into safe investments (bonds, money markets, guaranteed annuity plans, etc.) And since everyone's an expert investor, of course everyone does that! Or, well, not.