Wednesday, April 1, 2009

401K Plans Responsible For Stock Market Bubbles

Without a doubt the stock market has been behaving erratically. Many people have lost much if not all of their 401K retirements. After, doing some research on the 401K plans, I discovered that there was a certain parallel between the market increases and the advent of 401K plans. If you have any doubt about this correlation, then I encourage you to compare stock charts to the inception of 401K plans in 1980.

401K plans tend to take a blind shotgun approach, though some will actually invest directly into the employees company. The blind shotgun approach, basically means that you invest in a particular market through a mutual fund. The fund invests your money in a broad spectrum of stocks in a particular sector. Most people don't have the time to investigate the fundamentals of all the individual stocks. This approach has some advantages, in that you do not lose all of your money if just the one stock you are investing in tanks. The disadvantage of not knowing much about your investment can weigh heavy not only on your own situation, but on the market itself. The markets need wise input from investors in order to prosper. Making matters worst is the inability of investors to pull their money out of the market.

All of this leads to a large amount of poorly invested funds, which ultimately leads to the bubble scenario.

A few government reforms can be made to curtail the impact on the markets.

1- Reduce the maximum amount an employee can invest in 401K plans from 14% down to 7%

2- Reduce the maximum employer matching contribution to 4%.

3- Allow individuals to earn interest on up to $50,000 tax free. This would be as an alternative way of saving to the 401K plans.

Government does not establish a lot of specifics on how 401K plans are organized. Companies devise much their own plans. Companies could take a split approach to the 401K, requiring employees to invest 50% of their money in mutual funds and the other 50% in no less than 2 and no more than 4 specific stocks. Employees could educate themselves on the specific stocks, while maintaining a broad spectrum approach with the other half.


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