Wednesday, January 24, 2007

Lies, damned lies, and self-delusions

by Ken Houghton

Via Brad DeLong and Barry Ritholz comes a sensible USA Today piece.

Generally, sensible. There is this:
Three out of 10 employees eligible for 401(k) plans don't participate, Hewitt says. That means investors are passing up free money in the form of matching contributions from their employers.

No, it doesn't mean that at all. It may mean that, but it may mean a lot of things:

  1. It may mean the employer does not match, or that the match is so limited and/or insignificant that it doesn't compensate for the lost liquidity
  2. It may mean the employee believes the limited choices in the 401(k) plan (e.g., company stock) are not appropriate for a diversified portfolio. (After all, one is already "long" the company in working there.)
  3. It may mean that the employee is living paycheck to paycheck, or paying down credit card debt, and cannot afford to wait until they are 59.5 to use that money.
  4. It may mean their spouse or partner's plan is preferable, and they elect to max out there.
  5. It may mean that they make too much money to qualify for a traditional 401(k), and the company does not offer a Roth.
  6. It may mean something else entirely

There are many possible reasons for not putting money into an account that cannot be accessed for many years without a penalty that may more than eliminate any employer match. "Passing up free money" isn't even likely to be in the top five.
It's certainly a leap from non-participation to passing up free money. You'd think that a survey statistic could be developed that would account for #1 and #5. Regardless, I put most of my chips on #3.
Or that don't expect to be there long enough to receive it.
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