Is 401k a scam?

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As millions of American workers saw their 401k became 201k since last year, this 401k thing suddenly becomes a hot topic. CBS 60 minutes did an excellent report on this topic.

Watch CBS Videos Online

My thoughts
We can not put all blame to the wall street and the market meltdown (whether they caused it or not). It appears to me as the American baby boomers approaching retirement, some of them sold their mutual fund in their 401k accounts when they saw market crash. On the other hand…

Mutual fund industry grew (and benefited) significantly from the boom of 401k in last 30 years. The “buy and hold” strategy mostly worked well both for employers (cutting pension cost) and money managers. But it only “appears” worked for employees because their gain is mostly on paper before this downturn. Besides “buy and hold” and tax deferral advantages, we were told:

1) Stocks have out performed bonds/money market by a few percentage points in a long tim horizon. This is meaningless if our stock mutual funds got hit while we “hold”;

2) Dollar average cost, meaning put some amount of money each month. Looking back we now know if we “dollar average cost” in last 10 years and invested in S&P500 index, we actually lost money.

I think the lesson for us is not to blame the greedy wall street or Vanguard, we should rather educate ourselves more on 401k, and perhaps come up with a better strategy. One thing I will do is:

If ( I >= 65 years old)
I will switch some money from stock funds to bond/money market funds;
Thinking new strategy now…

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