Markets go down regularly. Index funds will go down with them. It’s certainly unlikely that 401k deposits will be cut in half, but if the index drops that far, so will they, regardless of how much new money goes into them.
About 15% of the market cap comes from 401k funds, as stated above. But what influence or stakeholder power does that buy them if the majority are in funds controlled by others? I don’t expect that my globally minuscule total of retirement funds of all types combined would get me anywhere, even if I shifted them all to one stock. Piling money into the market happened in 1929 and where did that get them?
The stock market has been increasing over time since the invention of the stock market. It went down significantly over a decade only once, and that was because of the Depression. The rise of the market since has a number of causes, but the only one that truly matters is that since the Depression the U.S. has had the greatest economy in the world. It continues to do so. Of course the overall market will go up in such an environment. So of course it makes sense for people with any amount of money to invest in such a market. The market drives the 401k’s not the reverse.
The next four years may be bumpy. But it won’t be because people suddenly stop putting their money into 401k’s.
For some reason I’m not following this part. I’m hung-up on the word “abandon”. Do you mean people stop putting money into that 401k account and just let it be?
A 401K is tied to an employer. If you don’t work there you can’t contribute to it. But you can keep it.
So Bob works for Company A for a couple of years and while there puts a couple thousand bucks into their 401K. Then he quits and moves to Company B. He also gets a new 401k at company B into which he puts some money per paycheck.
Real quickly he completely forgets there’s any money in a 401k tied to company A. Meanwhile he’s moved residences and company A where he doesn’t work any more has no ability to find him. Neither does the financial company that manages Company A’s 401K. And so there his Company A 401k sits, just earning interest/growth forever (less fees of course). 50 years later he dies penniless unaware of the money still sitting in his 401k from Company A.
So yes, “abandon”.
The right thing to do is as soon as you leave an employer you can roll the money in your 401k tied to that former employer over into your own IRA. A few employers’ 401ks will accept a 401k → 401k rollover from a prior employer. But that’s real rare. If they do, you could roll the money from the old employer 401k into your new employer 401k, and etc., as you job-hop your way to eventual retirement. Aside: If I was Emperor, plans accepting incoming 401K rollovers would be mandatory and would occur automatically unless opted out of each time.
But absent the 401k → 401k option you can still roll each 401k into your IRA(s) as you leave each employer.
OTOH, for the administratively challenged, terminally lazy, or folks with chaotic lives this is all too hard and the money will simply be lost.
Something like 25% of all 401k balances in the US or $1.7 trillion are considered abandoned, that sit in about 29.2 million accounts. That’s an average of $56k per abandoned account.
Each state has different requirements for financial institutions that hold abandoned accounts. Most have a requirement of escheatment that accounts must be turned over to the State to attempt to find the owners. If the ultimate owners are not found then the State moves the funds into the States general funds.
Approximately $64 billion a month is contributed to 401k plans by the 70 million active participants in 401k plans in the US. Again, regardless of how the market is doing. Total amount invested by all 401k participants in the US, not including IRA investments, is about $7.4 trillion.
I think we did this a few years ago. You will find this number in many, many news articles. The source (if cited) is a company called Capitalize.
Here is their white paper. The methodology is on page 15.
Note that their definition of “abandoned” seems to be that the employee is not currently employed by their plan sponsor. This includes my father’s 401k, from which he has been drawing RMDs for almost 20 years. He just doesn’t want to roll it over.
Thanks for the clarification. That definition of abandoned makes the number way overstated in my opinion. I have 401k’s from two jobs that i didnt move. I didnt Forget any of them–I track their balances daily. The point about fees is very important though–Ill double check to ensure I’m not getting nailed with fees–if so I’ll surely move the funds to an IRA account.
A couple of years ago, our 401k custodian told us that there were thousands of accounts that were not receiving contributions. More accounts than were receiving contributions in fact.
The dollar amounts of those non-active accounts was a tiny, tiny fraction of the plan size. Like less than 5%. Most of them had less than $1000 in them. Over 50% of the plan value was in accounts with a value over $1M. People who had been maxing out contributions for 15, 20, 30 years.
There were zero accounts over $1M that were not for current employees.
If there really is an average of $56k per account in millions of accounts that really are abandoned, I will eat my hat
The 401k custodians actively want retirees to leave their money there. Whether they’re withdrawing from it for grocery money, due to RMDs, or just letting it sit and (ideally) grow. I don’t have any 401ks at former employers, but if I did it’s a good bet those custodians would also prefer I leave my money with them too.
My recent and final employer’s 401k custodian is Fidelity and the expenses are negligible. From a finance-only perspective it’s in fact a wise decision to leave that 401K money there with good accessibility, a great website, access to the stocks & bonds & funds of the entirety of the world market, and negligible fees.
For the rest of my personal situation it makes more sense to eventually roll it out of Fidelity and into my IRA elsewhere. But that’s about reasons other than just the dollars and cents. And “eventually” hasn’t quite matured yet; maybe next year.
It seems ludicrous to use the word “abandoned” to describe accounts such as mine.
My defined benefit pension was stolen twice in the course of two bankruptcies.
My DB pension from the first company for whom I worked 13 years was reduced to a one-time payment of $56. I went to the grocery store, bought 56 dollars worth of cheap beer and drank my entire pension over the course of a couple months after that. I’m rather proud of that maneuver.
My DB pension from my second, much more successful, company for whom I worked 22 years was reduced to the princely sum of $404.70 per month for life. With no inflation corrections. My monthly car insurance is more than that now. By the time I’m elderly I bet inflation will have bumped my monthly grocery bill to be more than that.
I’m doing just fine nevertheless, so don’t worry for me personally. But DB pensions are not part of the picture for most current airline folks even though many almost-retired or long-retired folks will be / have been reaping the benefits of the once generous DB pension schemes they worked under most or all of their years.
As someone almost 70 with large savings (and a DB pension) one fund is invested in “agressive” (ie. stocks) and the other more conservative. But I may be unusual in that I meet with a banking adviser every year or so to ensure my and my wife’s savings are set for the right level of aggressive investing.
(My savings are mostly RRSP’s, the Canadian equivalent of an IRA) Since I don’t have to begin pulling a set fraction of the money out until age 71, for now they are just growing.
I don’t know if Boomers have a large share of the market because of earlier better economy, or simply because we’ve been saving longer? Certainly there’s the demographics, the size of the boomer generation - but will following generations also have the same level of savings at our age? Plus, North America compensates for demographic shrinkage with immigration, so the “pyramid scheme” collapse is likely not as dire as predicted.
It’s one of the thing I wonder, whether the market will become depressed as more elderly are in the process of cashing out rather than adding to savings or letting them percolate. (I suppose the same can be said of the house market as elderly downsize, and I don’t know of that being an issue).
Mutual funds are good and bad. If you know nothing detailed about the market (like most people) it’s a simple way to invest. The downside I’ve read about is the mutual fund strategy - they work with a basket of stocks. For example, if computers or cellphones are “hot” they will buy not just one company, but by the maixm “don’t put all your eggs in one basket” they would buy say, not just Apple and/or Samsung but some of all players in that market. (and the opposite, the fund guidelines may say sell because of one underperforming company) This may help boost other companies’ stock who don’t deserve it and for whom most investors would avoid buying. The fund’s goal is generally to not do worse than the market average.
I have a marginally reasonable pension (about double the size of yours) from my first company, after two mergers it’s now from HP, administered by Fidelity. Depending on when I take it, for me, it’s nice to have but not something to base retirement on.
My wife has a teachers pension out of RI, and it was almost cut in half due to the state mismanaging and spending the money. She was somewhat lucky as she is still working; retirees already collecting their pensions had their monthly payments nearly cut in half. That’s pretty much disaster for the elderly already on fixed incomes and without Social Security.
I’ve never seen a 401k (or similar) plan that doesn’t allow rollovers - plan sponsors and their agents are more than eager to suggest rolling your old 401k into the new one so they can collect fees on those assets.
Fidelity makes it easy to roll your 401k sponsored by your former employer (hosted at Fidelity) into a Fidelity IRA, with likelly more investment options.
Another consideration is that 401k is generally safe from judgements while IRAs are not.
The way to address this is to have an umbrella insurance policy of $1M-$5M, depending on your net worth. It is very affordable. Ours comes out to a fraction of a basis point of our net worth.
There’s no logical reason 401ks should be judgement-proof but IRAs not. But such is the law.
Absent rollovers, folks’ 401ks ought to have much larger balances given the much larger (~10x) contribution limits. When it comes to lawsuits there’s always a public policy tradeoff between not letting baddies get off by claiming (rightly or wrongly) penury, versus not letting crazy or wrong judgments impoverish somebody who’s going to end up a ward of the state.
My retirement stuff has been self-consolidating into Fidelity over the past few years. The employer I spent the most time with was always with Fidelity; I have the bulk of my savings still in the 401k plus I have a small defined benefit pension when I choose to start taking it.
A couple of years ago my next employer moved from Vanguard to Fidelity, so my 401k also moved. Then last year my small defined benefit pension from GE Healthcare also moved to Fidelity.