Do 401K Plans Create a False Market?

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Rush
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Do 401K Plans Create a False Market?

Postby Rush » Fri Jun 08, 2007 3:55 pm

PREFACE: I don't know the answer, but I am a market pessimist. . .

I like to look at DJIA graphs and noticed that from about 1965 to 1985 the graph remains flat (and that's without adjusting for inflation). Another poster mentioned they have achieved a 16% return from 1985 to present. Looking at the graph, that return looks like it's right, if not even low. Then I got to thinking about my personal 401k. The only two reasons I participate in my 401k is for the match and being able to use pretax dollars. Strangely, there should be a third reason: Because I want to buy the funds that are available in my plan. In other words, I'm buying a handful of funds only because I've been bribed by my employer and my government, not because those are funds that I want to buy. Many of my co-workers couldn't even tell you the name, ticker symbol, or how to log on to their account, much less make an informed "buy" decision. Something seems fishy about the demand side of the market - it's as if many, dare I say millions, of people are buying stocks for other reasons than because the stocks are a sound purchase. Interestingly, the 401K plan was implemented in 1979, just before our market shot for the stars which is consistent with heavy demand driving up prices.

Conversely, I think about the "sell" side of the equation. The government will make it sting pretty sharply should I decide to sell any of the stocks that I was bribed into purchasing. That seems to create another false set of market demands by taking away our ability to sell the stocks we didn't really want to buy in the first place.

Is a backfire possible? I think of pyramid schemes in which people early in the pyramid make a lot of money, those in the middle make enough to recruit others, and those at the bottom don't make any money until they've ascended to the middle, but because the bottom tier has testimony from those above them, they too recruit others. With certainty, eventually the pyramid fails and those forming the base of the pyramid (which is also quite wide) lose a lot of money - it eventually collapses, even though in theory it should continue ad infinitum.

Maybe I'm crazy or just plain stupid - but it seems ironic that our market has escalated so quickly since the 401K plan was implemented. What I'm really concerned with is the virtual spitting in the face of supply and demand to determine fair market value of stocks. We're bribed to buy and we're strongly reprimanded if we sell. Like the pyramid scheme, something has gotta give. Maybe we're top and middle pyramid people and don't have anything to worry about - maybe it's our kids who will find themselves crushed at the bottom of the pyramid. . .then again, maybe I'm way off base. Only time will tell.

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Re: Do 401K Plans Create a False Market?

Postby pf101 » Fri Jun 08, 2007 7:13 pm

Rush wrote:Conversely, I think about the "sell" side of the equation. The government will make it sting pretty sharply should I decide to sell any of the stocks that I was bribed into purchasing. That seems to create another false set of market demands by taking away our ability to sell the stocks we didn't really want to buy in the first place.

Maybe I'm crazy or just plain stupid - but it seems ironic that our market has escalated so quickly since the 401K plan was implemented. What I'm really concerned with is the virtual spitting in the face of supply and demand to determine fair market value of stocks. We're bribed to buy and we're strongly reprimanded if we sell. Like the pyramid scheme, something has gotta give. Maybe we're top and middle pyramid people and don't have anything to worry about - maybe it's our kids who will find themselves crushed at the bottom of the pyramid. . .then again, maybe I'm way off base. Only time will tell.


I'm not sure that I agree that you're reprimanded if you sell what you were 'bribed' to buy. There aren't any penalties if you sell your invesments, just if you take the money out of the account. If your company only offers Oppenheimer funds and then you leave and roll your money to an IRA, you can then invest in pretty much anything you want from cash to individual stocks to real estate and there are 0 penalties as long as you don't take the money out and use it. You're only stuck with the funds your company 'bribed' you to buy until you leave that company.

Maybe I'm missing something...

I can see your concerns about an artifical inflation of the markets due to 401ks though. The markets have definitely changed since their inception - more average joes are in the market than ever were back before 401ks were established. But I don't really see there being any kind of backlash - at least not for a long time - because as more companies offer retirement plans and as more people invest independently due to lower entrance barriers, money will just keep entering the market. Like you said though, only time can tell.

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Postby JerichoHill » Sat Jun 09, 2007 11:47 am

Rush,

401Ks do not artificially prop up the market. What happened to the market was a shift in its purpose. Stocks went from a dividend yield instrument for rich folks to a capital appreciation instrument for alot more folks. Companies now use stock to raise more funds than they did before.

I am not a market pessimist. However, I don't trust just one market. Diversify everywhere.
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Postby Rush » Sat Jun 09, 2007 1:49 pm

JerichoHill wrote:Rush,

401Ks do not artificially prop up the market. What happened to the market was a shift in its purpose. Stocks went from a dividend yield instrument for rich folks to a capital appreciation instrument for alot more folks.


Did the shift occur at or near the same time the 401k plan was enacted?

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Postby plonkee » Mon Jun 11, 2007 1:49 am

Did the shift occur at or near the same time the 401k plan was enacted?


I don't know too much about the situation in the US market, but in the mid 80s the London Stock Exchance essentially became a lot more de-regulated (big bang) and I think that hastened the shift over here. It wouldn't surprise me if the London stuff was pre-empted by things happening on the New York Stock Exchange.
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Postby JerichoHill » Mon Jun 11, 2007 6:57 am

Rush wrote:
JerichoHill wrote:Rush,

401Ks do not artificially prop up the market. What happened to the market was a shift in its purpose. Stocks went from a dividend yield instrument for rich folks to a capital appreciation instrument for alot more folks.


Did the shift occur at or near the same time the 401k plan was enacted?


I believe the 401k plans did not predate the market shift.
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Postby Rush » Mon Jun 11, 2007 10:37 am

JerichoHill wrote:
Rush wrote:
JerichoHill wrote:Rush,

401Ks do not artificially prop up the market. What happened to the market was a shift in its purpose. Stocks went from a dividend yield instrument for rich folks to a capital appreciation instrument for alot more folks.


Did the shift occur at or near the same time the 401k plan was enacted?


I believe the 401k plans did not predate the market shift.


Hmmm - so, erm, well, do you believe the incredible growth since 1985 may have something to do with the advent of the 401K? Millions of new investors and dollars are put into the market since the 401K plan started. Is it only a coincidence? Maybe the fact that people can't remove their money is why the market has avoided a sharp drop. Maybe in the "olden days" a 911 event would have caused a much more severe decline and a much slower recovery if not for the fact that so much of the money is locked into place and new money is on 401K auto-pilot. . .

It seems to me that we can't buy $100,000 worth of stuff, wait, and sell that stuff for $350,000 perpetually. I do see inflation effectively increasing the money and I see population growth effectively increasing the money, but growth beyond those two fundamentals can't be perpetual - surely there will be losers? Doesn't there have to be?

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Postby plonkee » Mon Jun 11, 2007 10:54 am

Essentially, if the stock market reflects the economy, then it will grow (in total and on average) at at least the rate of inflation. If there are new opportunities, essentially caused by new ideas and efficiencies then it will grow at more than the rate of inflation. If the stock market reflects the economy.

I don't think its likely that a lot of 401(K)s will cause the market to tank. In the olden days, before they had those, how did people pay for their retirement? I don't know about the US, but in the UK people tended to have final salary pension and state pension. Final salary pension were paid for by investing in the stock market and withdrawing the money on retirement in exactly the same manner. There could be a problem with the baby boom because there are so many of them and fewer of everyone else, but I don't think thats specifically to do with 401(k)s.

The reason that I feel that companies use of the markets to gain capital is unrelated to 401(k) usage because it has happened over here also, at the same time and we have different retirement / pension arrangements. In particular personal responsibility for retirement savings is much, much more recent.

There is no reason to say that this growth will go on forever, if it stops completely, we will be using (or have to use) a new economic system. Capitalism in its current form seems to require continuous growth. I also cannot see a good reason why growth should continue forever, but I am at a loss as to how to mitigate for that circumstance.
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Postby Rush » Tue Jun 12, 2007 7:45 am

plonkee wrote:There is no reason to say that this growth will go on forever, if it stops completely, we will be using (or have to use) a new economic system.


I'm certain the economy will not stop completely from growing (barring some wildly unforseen event(s)). The two fundamentals of inflation and population growth will sustain the economic growth of our market system. The inflation factor is not a real growth of assets, merely a sustaining of purchasing power while the population growth (about 1.2% in the US, but expected to grow slower than ever from 2030 to 2050) accounts for increased revenues for most every demanded product.

You mentioned the additional growth beyond inflation and population being attributed to increased effieciencies (ie lowering the cost of goods sold). Thinking outside of the 401K impact (if it exists), starting in the early 1980s computer technology has certainly been a driving force behind corporate efficiencies and we're still discovering and implementing new uses to descrease operating costs. We employ people from all over the world who'll work for a lot less money which further decreases operating costs. Maybe during the flat decades of 1965 to 1985 it was that new efficiencies had not been discovered or corporage America was otherwise tapped out of ideas that make an impact on the reduction of operating costs.

Good stuff.

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Postby plonkee » Tue Jun 12, 2007 11:33 pm

Maybe during the flat decades of 1965 to 1985 it was that new efficiencies had not been discovered or corporage America was otherwise tapped out of ideas that make an impact on the reduction of operating costs.


Thats a great suggestion. I wonder if its also got anything to do with a hangover from the post war boom? At least there was a huge post war boom over here, full employment, not enough people for jobs, huge increases in disposable wealth etc in the 1950s and early 1960s - so once that ended people were out of practice at innovating or becoming more efficient.
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