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Home Publications Blogs Beat the Press What Does It Mean to Say That Investing in a 401(k) Is Safer Than Investing in Stocks?

What Does It Mean to Say That Investing in a 401(k) Is Safer Than Investing in Stocks?

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Thursday, 30 June 2011 04:04
The NYT reported the results of a telephone survey which found that 41 percent of respondents thought a 401(k) or IRA was a better long-term investment vehicle than investing in stock. It's not clear what question people thought they were answering. The vast majority of people who invest in stock do it through a retirement account. Therefore, it's not clear what it would mean to say that investing in a 401(k) or IRA is better than investing in stock.
Comments (8)Add Comment
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written by AndrewDover, June 30, 2011 6:18
Most likely people bundled these positive aspects of 401K into their choice:

Employer matching,
Postponement of taxes until withdrawal,
No taxes during compounding period.

Interesting to see that Independents(34%) are the largest voting block, then Democrats(33%), then Republicans(26%).
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written by izzatzo, June 30, 2011 6:22
Survey respondents were also confused when asked if they preferred to invest in a second pair of eyeglasses to act as a capital good when looking for the first pair as a consumption good.
ADover
written by bg, June 30, 2011 6:39
But how do your 3 points prove that they know the investments made by their 401K manager? % of stocks v. % of bonds, etc. Unless their company 401K allows them to choose index funds over managed funds, etc. they have little control over the investments made.

Again, without questions to clarify the types of 401K that the respondents are invested, the results seem useless.
Choices
written by AndrewDover, June 30, 2011 7:52
@bg,

Lack of knowledge of investments can occur in or out of a 401K. But the typical 401K plan does provide for a wide degree of choice in investment type, with all that I have seen having a money market fund and a stock fund.

Most 401K programs allow the employee to choose the proportion of funds in money market funds, bonds, and stocks. The standard guidance is to choose a mixed fund based upon your retirement age which increases the amount of bonds as you grow older.

Index versus managed is simply a question of whether you think the higher fees result in better results. (Historically, they have not.)


The poll question was:

Which do you think is the best long-term investment for the average American today ?:
5% The stock market
22% Savings/Money Market
26% Home
41% IRA or 401K


I merely pointed out that IRA/401K have tax and matching advantages, and thus the public is reasonable to prefer them over direct investing.

Respondents gave a reasonable answer
written by Gary, June 30, 2011 8:37
Assuming respondents answered the question Dean Baker describes and the one quoted by AndrewDover, and assuming that a large percentage of respondents agree with Dean Baker that house prices are still 10% higher than seems justified by fundamentals, it is hard for me to see why their answers are implausible. A plurality of respondents picked "IRA or 401K" over "Home", "The stock market", and "Savings/Money market." For active workers, contributions to an IRA or 401K plan offer at least two advantages:

(1) Deferral of taxes owed on current earned income (money put in the plan does not get taxed in the year it would otherwise be received as wages); and

(2) Broad choice over the type of investment the worker can make.

For some workers, a 401K plan offers a third advantage: An employer may match some or all of the worker's own contribution, immediately improving the return the worker receives on his or her investment.

A crucial point, however, is that workers are not forced to invest their savings in stocks. They can investment them in bonds, or real estate investment trusts, or stable value / guaranteed income funds.

I would have been among the 41% of respondents who answered "IRA or 401K." Somehow, I suspect Dean Baker would have answered the same way.
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written by Jay, June 30, 2011 11:46
The question isn't great. How is investing in an IRA or 401K the best investment when it is not an investment in itself? It's like saying flour is the best food in the world without considering that you need ingredients to make something worthwhile. It might be a good means of investing but it is not an investment in itself.

We should all know what happened to people with a 401K or IRA that put a 100% in S&P 500 stocks over the past 12 years or 100% in tech stocks in the 90s. Sometimes, you can get lucky but being oblivious is a dangerous way to invest.
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written by markbn, June 30, 2011 7:21
Guess what? People are so stupid, they don't realize they are investing in stocks and bonds when they invest through a 401(k). I kid you not.
Most people can't pick individual stocks
written by Melissa, July 01, 2011 7:25
Many respondents may have taken the "stock market" choice to mean buying individual stocks, whereas their 401Ks are almost all mutual funds that may bundle hundreds or thousands of stocks together. If so, then it's a good thing that so many people understand that they aren't competent to be banking their future on their ability to pick individual stocks.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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