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by randogogogo
2479 days ago
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I guess I'm not old enough to have thought through this already, but it was explained to me early on in my career that 401k plans should be divested slowly as one approaches the end of their career. Is this atypical compared to how it actually works in reality? |
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Most "age-based" or "target-date" Active Funds that 401k providers sell are built precisely around managing this gradual multi-decade progression from mixtures high in stocks to those higher in bonds.
(You probably don't want to divest from the account before you retire because you'll pay heavy taxes on it. You simply want to manage the asset mix inside it. You generally want to avoid divesting as much as possible [and want to try to keep it as slow as possible] after you retire simply because passive income is more sustainable than asset liquidation in the long term.)
The reality though is that 401ks are individual accounts for better and (mostly, much) worse. Even when people follow the best advice, they rarely hit the right passive income numbers for a living wage. 401ks also wind up with more people gambling with such savings without thinking about the long term. Then there's simply the fact in the horribly messy transition between group pensions and individual 401ks that there are a lot of "short timer" 401k accounts out there among "Baby Boomers" and "GenX", that people will just cash out when the right retirement age happens to avoid tax penalties, or when the need is greatest (or anything in between), because there's no chance they'll ever make enough passive income and the account itself at that points for most purposes is merely a tax shelf.
Reality is full of a lot a 401k accounts that are managed only so well as the account owner and maybe the interests of the bank involved in holding the account. Which is also why the world is full of a lot of bad 401k advice and advice managers, because we've distributed that cognitive load across almost the entire populace. (As opposed to classic group pensions that could afford full time managers with CPA degrees.)
A lot of the possible "mismanagement" advice lately is a Boomers in particular were sent a lot of advertising / clickbait / thoughtpieces on how much Index ETFs are generally better than Active Funds for the simple reason of Fees. An Active Fund, especially one such as the age-based or target-date funds, charges higher fees than a passive fund like an Index ETF. In the same magic that creates passive income, compound interest, whatever you save on fees multiplies greatly over time. Unfortunately for the Boomers, while this is potentially great early career advice [1] when the age-based/target-date active funds are most active (higher stock mixes), passive funds are still a higher risk late career than the usual bonds and similar securities such funds push to late career.
(Which returns to the topic of the article at hand, this is why Burry, as at least one investor, is worried about this over-sale of Index ETFs. Index funds in the last few years have generally done better than both traditional securities [not really a surprise] and active funds [possibly a surprise; Burry describes it as an unstable bubble, but may be hyperbolic], so there's been a lot of short term investors in that game. There probably are enough Boomer 401ks alone that are in "short time" mode ticking time bombs full of Index ETFs that should they all start coming due and trying to liquidate/divest, we might see if passive Index ETFs can handle the trade volume the hard way, which is what Burry is worried about.)
[1] Depending on your investment management time, of course. The majority of people with 401ks already have at least one full time job and likely don't have time to also become their own personal pension fund manager.