A Confusing Puzzle Made Simple – Retirement Plans

A version of this post ran earlier in the San Antonio Express News


I recently received in the mail retirement plan documents for a local employer’s 403B plan.

I’m going to spend the first part of this column complaining about this 403B plan provider. Later, I am going to offer a better, simpler, version of the plan. And that better, simpler, version of the plan will make 99.5% of all investment advisors throw up in their mouth. But they are wrong and I am right.

But before I complain

Let me start with an important public service announcement first:

403B plans and 401K plans – employee-sponsored, tax-advantaged retirement accounts for non-profit and for-profit employers respectively – are Totally. Freaking. Awesome.

If you have access to one of these through your job, and you are not taking full advantage of these accounts, then drop your newspaper or iPad right now – seriously, right now – and call your HR department and sign up for automatic payroll-deduction investing.

Do it. I’ll still be here when you get back.

What are you waiting for? I said I’ll be right here.


Ok. Are we good?

Now then, my complaining

I received in the mail this packet entitled “important information about your retirement plan,” consisting of 42 pages, printed on double-sided paper and in small letters. You might be able to guess where this is going.

The problem

I’m bothered not by any deficiencies in the plan, but rather, the opposite. The document provides a gold-plated menu of options.

The problem is that anybody except a sophisticated financial professional would find the choices totally overwhelming.

I did some simple addition and this is what I found:

141 mutual funds of 100% stocks;

38 mutual funds of 100% bonds;

41 mutual funds with a blend of stocks and bonds, in varying proportions;

6 money market mutual funds; (By the way, this is perhaps the most ridiculous part of the whole list.  A money market fund is a money market fund is a money market fund. You don’t need 6 to choose from.)

6 fixed return investments;

1 lifetime annuity investment;

And a partridge in a pear tree.

Hello? Is anybody there? This makes me so mad.

Paradox of Choice

These choices make no sense. You would think the designers of this 403B plan had never heard of the behavioral finance theory known as the ‘paradox of choice’ idea in retirement planning.


Behavioral economists have shown that the more mutual funds you offer, the less likely people are to actually invest in anything. We tend to choose instead to delay decision-making to some later date. And that delay, in the case retirement planning, is a horrible outcome.

An economist’s study using data from fund company Vanguard showed that for every additional 10 mutual funds offered in a retirement plan, the rate of employee participation in the 401K and 403B programs declined 2%.

If you offer 50 additional funds for example, we would expect 10% fewer employees on average to participate in their retirement account.

The decision – due to confusion – to defer contributing to some far-off future date may cost you millions of dollars in your retirement. I’m sure the friendly folks in charge of designing this 403B plan felt good about offering so many choices because, hey, more choices are better, right?

Unfortunately, not when it comes to encouraging people to invest in their retirement accounts.

My solution, as DRAGO

Sometime in 2035, when I am elevated by President Miley Cyrus to the post of Dictator of Retirement Account Great Options (You can just call me DRAGO, for short) there will be two – and only two! – funds to choose from.

Miley Cyrus is a Patriot

In this way I will maximize your participation.

Risky and Not Risky

I will call these two funds Not Risky, and Risky.

Not Risky will never lose you money. Not Risky will provide you between 0 and 2% positive annual returns year in and year out. It will also never make you any money on your money, especially after taxes and inflation.

If you have 10 years or more until your retirement (a key ‘if!’) Not Risky is totally forbidden for your retirement account.

Risky, by contrast, is quite volatile. You can lose as much as 30% of your investment in one year. You can also gain as much as 30% in one year. Viewed over long periods of time, Risky has returned about 9% per year in the last century. Risky is also the only way to actually grow long-term wealth with your retirement account.

In the future with Risky, you should reasonably expect no more than 6% annual returns, over the long run, with tremendous volatility in the short and medium run.

But after taxes and inflation, Risky offers you a far better return on your money than Not Risky, many, many times over.

Finally, as your DRAGO, if you have more than 10 years to go until your retirement account (a key ‘if!’), I will force you to only have Risky in your portfolio.

Retirement money for most of us, remember, is long-term money. For most workers in their 20s, 30s, 40s, and 50s, retirement is more than 10 years away.

Only if you plan to retire within the next ten years (a key ‘if!’), will DRAGO allow you to invest in a blend of Risky and Not Risky.

In this way, I will maximize your wealth in retirement.

You can thank your DRAGO, as well as President Cyrus, for this important service and improvement in your quality of life in your retirement years.



please read related posts:

Stocks v Bonds, the Probabilistic Answer

Book Review of Simple Wealth, Inevitable Wealth by Nick Murray




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Ask an Ex-Banker: How to Invest Unexpected Cash

A friend asked me recently for investment advice.  I sent her my thoughts by email but couldn’t resist making it into an “Ask an Ex-Banker” post.

Fear and Greed

Question:  My daughter got caught in the housing downturn and finally has sold her condo in NY but is too poor in this economy to buy a bag of chips, let alone a house in LA.  So she is trying to figure out what to do with the $90,000 left over after paying off student loans and replacing a broken car.  Do you have any suggestions for earning more interest?  K__ and I could use a suggestion as well, but none of us can stick it away for 3 years because as optimists, we are always hoping things will change.   Thanks.  Paula H., Sarasota, FL


Hi Paula,

It’s nice to hear from you.  Thanks for reaching out!

Sorry to hear about your daughter D’s housing condo mess, but, from a distance, my first thought is that it could have been worse.

Despite getting caught in the housing downturn, she came out $90,000 ahead – after student loans and a broken car – a victory.  It gives her a positive net worth, something most people in this country don’t have.

In my opinion, the first and only difficult thing about a pile of money like this is deciding whether you should put it in the ‘Risk’ or ‘No Risk’ investment bucket.

‘No Risk’ includes things like cash, a bank account, money markets, and annuities, while ‘Risk’ encompasses just about anything else, typically stocks, as well as real estate, and funkier investments as well.  We tend to assume lots of different flavors of ‘Risk’ investments, but I’m increasingly convinced all ‘Risk’ investments are fundamentally the same.  You can make money, you can lose money, but there’s no guarantee you’ll get all your money back when you need it.

If you decide on ‘No Risk’ then you should expect virtually no return, just the same amount of money available to you when you need it next.  If you decide ‘Risk’ then the investment could go up or it could go down in value, but, in the short run at least, there’s no way to know where you’ll end up.  The key advantage to dividing up the world this way – into these two buckets – is that it forces you to realize the illusion of having both safety and a good return in the same investment.  You can’t.  Anyone who offers you both absolute safety and a good return is lying.  Run away from them.

In your question you’ve already hit on the key answer/problem in your question: Timing.  If D might need the money within 3 years there’s no chance to earn a decent investment return, while also entirely protecting principal.

Earning a reasonable return right now, without taking risk, is impossible.  If you choose the safe approach, you earn nearly nothing – $900 per year, or 1% on $90,000 – which won’t buy much.   It’s hardly worth the effort of opening up the bank savings account.  Interest rates are on the rise now, but from such a historically low base that they’ve got a way to rise before return on traditional savings will be “worth it.”

On the other hand, investing it ‘in the market’ or in another risky asset like real estate means that your $90,000 could be a lot smaller by the time you try to actually get it back.  It very well might be larger too, but that’s just one possibility, not a guarantee.  If you have to have at least $90,000 when you want it back, then ‘Risk’ isn’t the right place to put the money.

So, now, to D’s particular situation.

If she’s a starving artist in LA, without a steady income right now, then it’s likely she’ll need to access at least some of that $90,000 in the short run, in less than 5 years.  To the extent she might need this money for living expenses anytime in the next 5 years, it needs to be in ‘No Risk.’  The return will be terrible, somewhere between 0% and 2%, but that’s just where we’re at.  It probably doesn’t matter where you invest.  Just stick it in a stupid bank savings account, earn the 0.9%, and be content.  Don’t even bother tying it up in a 2 year CD offering 1.9%, because it just doesn’t matter.  Another $900 per year won’t compensate for the fact that she can’t access all the money if she really needs it.

When would it make sense to invest in something Risky?  It depends on her time horizon for accessing the money.

Less than 3 years, no way.  ‘No Risk’ bucket only.

Over 5 years, start to lean towards Risky.

Over 10 years, put all of it in Risky.

If D’s music royalties or other income can reasonably cover her monthly expenses for the next 5 years, so she knows she doesn’t have to access the money, then it seems fine to pick something risky.  Put it in a low-cost, all-stock mutual fund and watch it grow.  Or use your real estate savvy to get involved in a rental building.

I wouldn’t bother with sexier higher-risk situations like oil royalties, film-financing, hedge funds, start-up businesses, or art unless she can blow the whole wad without missing it.  It might make 10X your money.  But it probably won’t.

Is there a course in between ‘Risk’ and ‘No Risk’ buckets?

Yes, for example, D may know she’ll only need a maximum of $30,000 to cover emergencies over the next 5 years.  In that scenario, make two allocations –  $30,000 into the stupid ‘No Risk’ bank account earning bupkis, and up to $60,000 in something that might earn a positive return over the long haul, like stocks or real estate.

The longer her $60,000 has to stay tied up in that Risky bucket, the higher the probability that the money will be larger when she needs it.  The key here, though – the really essential point – is to know ahead of time which money she can’t afford to lose because she’ll need it, and which money she can afford to risk, because she won’t need it, ideally until retirement.

For you and your husband K, the equation might be different.  I’m presuming you’re much more likely to have your monthly expenses covered in the next few years, so you can afford to make much riskier choices.  If you lost some of your $90,000 in a risky situation that didn’t work, you’re still less likely to depend on the principal for daily living.

Your time horizon for choosing risky investments is probably better than D’s.  For K and you, putting the money ‘in the market,’ or in a real estate opportunity seems perfectly reasonable to me, if you can weather the volatility.  It makes sense to me that you’d invest the $90,000 differently than D should.

I know I’m not giving creative investment ideas that offer both safety and good return, but the fact is that usually – and certainly now – we can get safety or good return, not both.

I hope this helps.

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