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When It Comes to Retirement Investing, Never Trust Anyone Under 30

By Chris Carosa

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Two recent surveys contain some unsettling results for today’s workers planning to retire in thirty years, and it’s the workers’ own fault (see “Will Plan Sponsors Leave the Under-30 Crowd Doomed to Repeat 401(k) History?”). All this means, though, is the more things change, the more they stay the same. 

Let’s hop on the Wayback Machine and head back to the 1980s, when hair was big, music was nerdy and rugged individualism was the mantra. Strange as it may seem, all three touched on this new retirement plan known as the 401(k). With its participant choice option, the 401(k) plan was certainly tailored for the individual in all of us.

With the growing power of personal computer spreadsheet software, charting investment strategies appealed to our inner nerd. Finally, with 30 or more years until retirement, those young workers astute enough to actually save had visions of more than big hair dancing in their bank accounts.

Aye, there’s the rub: “Those young workers astute enough to actually save.” Unfortunately, it turns out he who bought the most toys did not win. The ones with the most toys are still working, still trying to pay off the debt of their carefree days. The savers won.

Well, not all the savers, only the ones who took a chance and bet it all on long-term growth (i.e., equities), have won the much coveted “retire in comfort” trophy. Again, too many savers decided life already had too many risks and did their best to avoid attracting any more in the guise of their retirement plan.

Whoa! Bad move. Little did they realize the real risk was not taking a risk. And by the time they did, it was too late.

And when did they discover the dangers of their recalcitrance? On or around 2006, when Congress passed the fabled Pension Protection Act. One of the primary objectives of that piece of legislation was to discourage 401(k) investors from investing too much into the popular stable income options.

Perhaps spurred by the predominance of asset allocation models, perhaps due to the lure of safety, perhaps due to the general financial illiteracy of the greater workforce, whatever the reason, prior to 2006 an extraordinarily large portion of retirement assets found their homes within the bowels of some insurance companies guaranteed contract (the typical component of a stable value fund).

So Congress, in its infinite wisdom, virtually directed all 401(k) investors to increase their equity exposure, mostly in the form of “customized” target date funds. By 2007, the switch had been made.

Oh, did I tell you the market peaked when the housing bubble popped that year? By 2009, the market – and the index funds most target date funds invested in – had dropped 50 percent. To say this freaked out 401(k) investors would be true, but only if they actually opened their statement.

The good news at the time: those who invested too much in stable value funds didn’t lose that much. The bad news for those investors: because they invested in stable value funds, they didn’t have that much to lose.

Contrast that to those psychically numbed equity investors who decided to hide their unopened 401(k) statements in the sand. Not only did their returns far exceed those of stable income 401(k) investors prior to 2007, but, by 2010, most if not all had recouped their losses.

This reality, however, has not overcome the incessant drumbeat of defeatism. The 1980s are no more. Today we live in an era of short hair, the stale sounds of remixed remakes and the collectivism of the nanny state. Young workers seek solace from some corporate parent rather than trusting themselves to chart their own destiny.

And yet, despite this 180-degree difference in philosophy, it’s likely the young workers of today are destined to repeat the same mistake of many of their parents more than a generation ago.

Which just proves when it comes to retirement investing, never trust anyone under 30.