Friday, October 31, 2008

Last days of the 401(k)?

A policy change being discussed by the political classes could affect the profitability of investing in stocks, and could therefore create long-term downward pressure on stock prices. Congress is considering eliminating the tax savings on 401(k) contributions and returns, and is discussing a plan to allow workers to replace current 401(k) holdings with a guaranteed retirement account composed solely of government bonds.

If these plans were put into effect, there would have to be another wave of sell-offs in the stock market as investors pulled out of their 401(k) stocks and mutual funds. There would also be reduced buying pressure in the stock market over the long haul since monthly deposits normally destined for 401(k) stock purchases would be going to the new guaranteed government plan instead.

With that potentially seismic change looming, I'm in no hurry to declare that the bear market is over.

3 comments:

Tim said...

I think that this is more of a solution to Social Security and pension plans although you won't hear any politicians say it. A potential GM/Chrysler bankruptcy and underfunded Pension guarantee corp are making people are realizing that the guarantees of 80% of regular income and Cadillac health care for life are unsustainable. A dismantling of the US equity market would destroy a major source of tax revenue and jeopardize US/western global leadership in financial Services.

Jim Driscoll said...

I don't think it matters - the damage is already done. Boomers will be retiring in droves, and moving their 401k money out of equities, for the next 20 years.

You don't need to change the law to make that happen more - it's already baked in.

Anonymous said...

Yet another example of a bad knee jerk reaction. Now is the worst time to cash out of the market yet the Congress encourages the people to do it.

No matter what the market does, I trust it more than the government with my retirement. We already have one government retirement system that is on the way to bankruptcy.

And what would the government do with all that money people will pull away from the stock market?

Oleg