Guess what happens when working poor invest in 401k’s

[Paratus]

They end up taking on more debt than they save.

WSJ (behind a pay wall)
https://www.wsj.com/articles/downside-of-automatic-401-k-savings-more-debt-1515148201

The] study found that four years after hire, the employees who were auto-enrolled amassed an average of $3,237 more in 401(k) contributions than those who were left to sign up on their own. (That number includes both employee and employer contributions, but not market growth.)

But the auto-enrolled employees also had an average of $1,563 more in consumer and auto debt than those who were hired before auto-enrollment. When mortgage debt is factored in, the picture becomes more complicated. The auto-enrolled employees owed $4,131 more, on average, on their homes than their colleagues who were hired before auto-enrollment.

This debt more than offsets the extra $3,237 the auto-enrolled employees contributed to the plan, including the employer match.

Now maybe that turns around for some assuming continued employment and steady investment gains over a longer time period, but damn if that isn’t disappointing.

 

[urvile]

I don't really know what a 401k is. I am not an american that's not going to stop me from commenting. In Australia we have superannuation this means a percentage of your income is sliced off and put into a superannuation fund by law. I think it is currently 9.5%. Superannuation funds are investment funds run by private entities. You have the option of making your own investments and operating the fund yourself. I know people who do this.

Sometimes superannuation is included as part of your salary package other times it is included on top of you salary. Generally these are the jobs I go for. The point of it is to force people to save for retirement is it government interfering with your right to spend your hard earned on crack? Sure. Currently it is a conservative government in australia that is slowly increasing the super percentage they are also increasing the retirement age.

The thing with aus is there are certain things that are not partisan super is one of those things universal health care is another.

God bless you guys though. One day you will catch up with the rest of us.

 

[Paratus]

I don't really know what a 401k is. I am not an american that's not going to stop me from commenting. In Australia we have superannuation this means a percentage of your income is sliced off and put into a superannuation fund by law. I think it is currently 9.5%. Superannuation funds are investment funds run by private entities. You have the option of making your own investments and operating the fund yourself. I know people who do this.

Sometimes superannuation is included as part of your salary package other times it is included on top of you salary. Generally these are the jobs I go for. The point of it is to force people to save for retirement is it government interfering with your right to spend your hard earned on crack? Sure. Currently it is a conservative government in australia that is slowly increasing the super percentage they are also increasing the retirement age.

The thing with aus is there are certain things that are not partisan super is one of those things universal health care is another.

God bless you guys though. One day you will catch up with the rest of us.

401K’s are a type of retirement investment account.

Your company contracts with a financial company like Vangaurd who allows your employees to invest in a number of different funds. Employers generally match a certain percentage. The government allows a certain amount of money to be put into the account tax free each year by the employee, (i think it’s about $18K currently)

So for example, if you made $100,000 a year, put %10 into the 401k and your employer matches 5% then at the end of the year:

• You’ve put $10K into the account
• Your employer has added another $5K for a total of $15K
• The government taxes you on $90K instead of $100K
• Any principal or investment gains are not taxed until money is removed from the account
• There’s 10% penalty on top the of taxes if you remove money before age 59.5

For well compensated employees with good fund options 401K’s are an acceptable form of retirement.

For the working poor with funds with higher fees it’s not as great a deal.

Every working person also pays into social security which pays you back on retirement based on a formula.

 

[alien42]

my job for half a decade, from around 2011 to 2016, was in the administration of 401k plans so i am quite familiar with this subject.

the auto enrollment in 401ks has absolutely nothing to do with individual spending.

what is relevant is that the average American spends more when the economy is doing well which is completely absent from the OP.

 

[alien42]

So for example, if you made $100,000 a year, put %10 into the 401k and your employer matches 5% then at the end of the year:

the problem with your "example" is that no "working poor" invests that much and no company matches that much.

you are clearly talking out of your ass.

 

[urvile]

401K’s are a type of retirement investment account.

Your company contracts with a financial company like Vangaurd who allows your employees to invest in a number of different funds. Employers generally match a certain percentage. The government allows a certain amount of money to be put into the account tax free each year by the employee, (i think it’s about $18K currently)

So for example, if you made $100,000 a year, put %10 into the 401k and your employer matches 5% then at the end of the year:

• You’ve put $10K into the account
• Your employer has added another $5K for a total of $15K
• The government taxes you on $90K instead of $100K
• Any principal or investment gains are not taxed until money is removed from the account
• There’s 10% penalty on top the of taxes if you remove money before age 59.5

For well compensated employees with good fund options 401K’s are an acceptable form of retirement.

For the working poor with funds with higher fees it’s not as great a deal.

Every working person also pays into social security which pays you back on retirement based on a formula.

Similar then. Except our retirement age is currently 64.5 (IIRC) which is being pushed to 67 over the next ~5 years. Currently I have my salary and the company I work for contributes the 9.5% on top of that. I have worked for other companies that include super in the salary package or I pay it out of an hourly rate. I pay it regardless. As I said I know people who handle it all themselves which is an option just so long as you pay super.....

Not that I really want to get into it. Just offering a different perspective.

 

[Paratus]

my job for half a decade, from around 2011 to 2016, was in the administration of 401k plans so i am quite familiar with this subject.

the auto enrollment in 401ks has absolutely nothing to do with individual spending.

what is relevant is that the average American spends more when the economy is doing well which is completely absent from the OP.

I don’t believe it’s the automatic enrollment per se that they point out, it’s that the working poor must pay enough to meet their living expenses. Those who are saving in 401Ks have less disposable cash and therefore takeout debt instead.

Also while people may spend more during a booming economy 401Ks generally have better returns while during recessions they generally spend less and have poor returns or losses. So I’m not sure what point you are trying to make as in either case the employees enrolled in the 401Ks will have a similarly worse debt to savings ratio.

 

[Paratus]

the problem with your "example" is that no "working poor" invests that much and no company matches that much.

you are clearly talking out of your ass.

That was an example of what a 401K is for our Australian friend who wasn’t familiar with them.

Those numbers are reasonable for well compensated folks like engineers and obviously way high for the working poor who are probably in the $25K per year and saving a few hundred per year if auto enrolled.

 

[alien42]

Those numbers are reasonable for well compensated folks like engineers and obviously way high for the working poor who are probably in the $25K per year and saving a few hundred per year if auto enrolled.

sorry, but that is completely false, after the 2008 crash, all of the company's that we administered 401k's for reduced their matches to a maximum of 3-4% for all employees. i began working for the company several years after that occurred but am quite aware of what happened at that point.

reality is that after the Bush economic crash corporate America reduced their participation in 401ks across the board.

 

[Paratus]

sorry, but that is completely false, after the 2008 crash, all of the company's that we administered 401k's for reduced their matches to a maximum of 3-4% for all employees. i began working for the company several years after that occurred but am quite aware of what happened at that point.

reality is that after the Bush economic crash corporate America reduced their participation in 401ks across the board.

That maybe. My experience has been different.

Over the last 20 years I’ve worked for oil and gas, two different government contractors and now as a civil servant.

Oil and gas, one of the contractors and the government all matched 4-5%.

The other contractor matched nothing but after a year they would dump a 10+% “bonus” into your 401K.

Being a civil servant currently has likely insulated me from some of the negative changes.

 

[Michael]

My experience with larger companies that 50% match up to 6% is pretty common (3% matching). Over 3% is pretty rare.

Michael

 

[Pulsar]

the problem with your "example" is that no "working poor" invests that much and no company matches that much.

you are clearly talking out of your ass.

I guess it depends how you calculate it. My company matches 60% of the first 6% of your salary. So everyone just puts in 6% of their salary and enjoys the match. You could say that's 3.6% of your total salary.... but then if you only put in 6% of your salary and use the rest of your money for other investments you're good. Frankly our 401k doesn't have a single index fund included, so 6% of my salary is almost too much to put in.

 

[tommo123]

401K’s are a type of retirement investment account.

Your company contracts with a financial company like Vangaurd who allows your employees to invest in a number of different funds. Employers generally match a certain percentage. The government allows a certain amount of money to be put into the account tax free each year by the employee, (i think it’s about $18K currently)

So for example, if you made $100,000 a year, put %10 into the 401k and your employer matches 5% then at the end of the year:

• You’ve put $10K into the account
• Your employer has added another $5K for a total of $15K
• The government taxes you on $90K instead of $100K
• Any principal or investment gains are not taxed until money is removed from the account
• There’s 10% penalty on top the of taxes if you remove money before age 59.5

For well compensated employees with good fund options 401K’s are an acceptable form of retirement.

For the working poor with funds with higher fees it’s not as great a deal.

Every working person also pays into social security which pays you back on retirement based on a formula.

i thought a 401k in more recent times is a big pool of money made by the plebs who are forced to play the long game in which wall street see how much they can drain out of it via their little games like shorting stock (how that's allowed is weird to me as it seems go against the idea of long term investment).*

*only just woke and have probably (definitely) worded that poorly i think

 

[Exterous]

That is disappointing. Do you have more of the article available to post? Another common recommendation is to auto enroll a portion raises to increase the contribution which may work better and better work with human psychology

the problem with your "example" is that no "working poor" invests that much and no company matches that much.

you are clearly talking out of your ass.

No companies? A previous one did 5% and my current one does 10%. Now it may not be common but that's a bit different than 'no company'

 

[interchange]

The problem I have here is auto enrollment. That indicates people don't know what's happening with their money, so it's a biased sample confounding judgment about their ability to manage debt. Plus, that's a paltry amount of retirement savings over 4 years. If someone making a low income is able to budget successfully to put a reasonable amount to retirement investment without accruing debt, they will have a drastically better financial future. But that's only if they are actively managing their contributions, debt, and lifestyle. The problem is that people don't do that well, and this is a problem nowhere near isolated to lower incomes.

 

[interchange]

I guess it depends how you calculate it. My company matches 60% of the first 6% of your salary. So everyone just puts in 6% of their salary and enjoys the match. You could say that's 3.6% of your total salary.... but then if you only put in 6% of your salary and use the rest of your money for other investments you're good. Frankly our 401k doesn't have a single index fund included, so 6% of my salary is almost too much to put in.

Some 401k plans are really bad deals, using employer match to entice contribution but are set up with high fee low return investments designed to make the financial industry money instead of the retiree. If you can't choose how your contributions are invested or your choices are bad ones, I'd invest on my own even foregoing matched contributions. A scam is a scam.

 

[Jhhnn]

Some 401k plans are really bad deals, using employer match to entice contribution but are set up with high fee low return investments designed to make the financial industry money instead of the retiree. If you can't choose how your contributions are invested or your choices are bad ones, I'd invest on my own even foregoing matched contributions. A scam is a scam.

Always enroll for the matching funds, even if you just pull it all out every year. It's free money. 4% of $20K is $800. Add your 4% to make it $1600. Pay the 10% surtax for withdrawal on all of it, leaving $1440 in your pocket. You're $640 ahead..

 

[Paratus]

That is disappointing. Do you have more of the article available to post? Another common recommendation is to auto enroll a portion raises to increase the contribution which may work better and better work with human psychology



No companies? A previous one did 5% and my current one does 10%. Now it may not be common but that's a bit different than 'no company'

I don’t. There was another article about the WSJ article that included those quotes.

The disappointing, although not surprising, thing is that the working poor, even when making all the right decisions, still have an incredibly difficult time getting ahead.

It flies in the face of, “If poor people just did the right things like work and invest they wouldn’t need government help.”

 

[vi edit]

For those in the know, isn't the auto enrollment a bit of game to boost stats? There are tests that 401k managers have to run each quarter to show plan engagement. If too few employees are enrolled higher income earners get screwed and aren't able to contribute as much. Forcing more people into the plan protects those higher earners more.

 

[interchange]

Always enroll for the matching funds, even if you just pull it all out every year. It's free money. 4% of $20K is $800. Add your 4% to make it $1600. Pay the 10% surtax for withdrawal on all of it, leaving $1440 in your pocket. You're $640 ahead..

Yeah that's wise. It takes action on your part, though. That doesn't happen very often at all.

 

[senseamp]

They end up taking on more debt than they save.

WSJ (behind a pay wall)
https://www.wsj.com/articles/downside-of-automatic-401-k-savings-more-debt-1515148201



Now maybe that turns around for some assuming continued employment and steady investment gains over a longer time period, but damn if that isn’t disappointing.

4k more owed on home could be a good thing if equity growth more than offsets that. Also, if interest rate is low, and 401k returns high, as has been the case last few years, they are almost certainly better off financing the car and putting money into 401k, even aside from tax savings. So it's not that disappointing.

 

[TheVrolok]

That is disappointing. Do you have more of the article available to post? Another common recommendation is to auto enroll a portion raises to increase the contribution which may work better and better work with human psychology



No companies? A previous one did 5% and my current one does 10%. Now it may not be common but that's a bit different than 'no company'

Just to add another anecdote, my company does 50% match of 8%, then an escalating core contribution for "time in." I'm basically getting a 7% match on my 403b. Fortunately, I also have access to a 457, although non governmental, it's still a pretty good deal.

 

[Bitek]

the problem with your "example" is that no "working poor" invests that much and no company matches that much.

you are clearly talking out of your ass.

I think he is just using nice round numbers for demonstrative purposes..

Apply the % as you wish to the income level you wish. Principal is the same.

 

[senseamp]

I just max out everything. 401k pretax, 401k aftertax with Roth conversion, roth ira if I am not capped out, and HSA.

 

[simpletron]

From the WSJ article

The good news, he and others said, is that the study finds no evidence that people who are auto-enrolled are running up more credit-card debt than employees who are required to sign up for a 401(k) on their own. Nor is the extra debt auto-enrolled employees take on causing their credit scores to deteriorate. Some of the added debt, particularly mortgage debt, may even boost participants’ net worths over the long run, the study says.

“Our conclusion is that people who are auto-enrolled do eventually take on more debt,” said co-author James Choi, a professor of finance at the Yale School of Management. “But they don’t take on more of the kind of debt that would be clearly worrisome,” such as credit-card debt, second mortgages or installment loans, which often charge higher interest rates and are typically used to purchase consumer goods rather than assets.

The study looked at the savings and debt levels of 32,073 civilian employees the U.S. Army hired in the 12 months before Aug. 1, 2010, when the federal government adopted automatic enrollment in its $537 billion Thrift Savings Plan. (While not technically a 401(k) plan, the TSP operates in a similar way.) The authors compared the payroll and credit-rating records of those employees to similar data for the 26,803 civilians the Army hired in the 12 months immediately after the government adopted auto-enrollment. With an average salary of just over $55,000, the civilian employees’ earnings are fairly close to the median household income in the U.S. of $59,000.

The first time that jumps out is the time difference between the two groups. Mortgage rates have been declining since the 80s by around 0.25 to 0.375 per year and in particular the average 30 year fixed mortgage rate in 2010 was 4.69 and 4.45 in 2011 (source: http://www.freddiemac.com/pmms/pmms30.html ). Now that 0.24 decrease doesn't sound like much but it would allow a person making $55,000/year buy $5,000 more expensive home with no increase in monthly payment. So the falling interest rates could explain all of the increase in mortgage debt.

For the consumer debt, If they aren't taking on more credit-card debt, second mortgages or installment loans, then there is only two big categories left, student loans and auto loans. Assuming the age profile of the hires doesn't change much from year to year, then the auto-enrolled group was born on average a year later than control group. This would implied that they went college a year later. The average debt of a students graduating from four-year colleges that has loans has increased by roughly a $1000/year and the percentage of students with loans has steady increased over the last 25 years. (source: https://ticas.org/files/pub/Debt_Facts_and_Sources.pdf) Auto loans, like the mortgages above, have also seen their interest rates drop, but because of the much short terms(3-6 years) this can only a explain a couple hundred bucks.

Now the article does state "After adjusting for differences in the economic cycle and in characteristics of the two employee groups, including education and salary levels", maybe the author did some corrections for these factors. The article implies that the study stripped difference the stock market performance for the 401K gain. But I have hard time coming up with a way to strip out the interest rate differences.

I believe this is the study, but I haven't read through yet.
https://scholar.harvard.edu/laibson/publications/borrowing-save-impact-automatic-enrollment-debt