401K Matching About to Start

Just learned that my employer is about to start a matching program on my company's 401k. First thing I did: suspend my contributions to the program.

Why continue to invest in the 401k when I can hold off for a few months and then get free money on my contribution?

Don't worry, I still have every intention of maxing out my contributions to my 401k, just as I do every year.

401k matching is awesome.

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Insanely High Public Pensions

Last week I came across this article in the WSJ which talks about the insanely high public sector pensions that some individuals are receiving. Here is a brief excerpt from the article:

"Those named are former public employees and their dependents who receive an annual pension of more than $100,000. Atop one list is a former city administrator from the small Southern California town of Vernon, whose annual pension is $499,674.84."

How insane is that? By comparison, the President receives an annual salary of $400K. Look, I am all in favor of people saving for retirement and having a decent pension after many years of loyal service. I think this is entirely justifiable. However, How is it possible or even legal for government agencies and public sector entities to pay such ridiculously high pensions? More interestingly, how is it even fiscally possible for a tiny town like Vernon, CA to support (never mind justify) such an obscenely high pension? According to Wikipedia that town had a population of 91 in the 2000 census. What is going on here?

Leaving aside the town of Vernon for a second, I did some research online to find the database of high pensions mentioned in the WSJ article and here it is. This list contains over 5,000 names of individuals who receive public pensions of over $100K annually, but it only includes individuals from California. How widespread is this phenomenon? Can it be justified that former public "servants" receive such huge pensions, backed by tax payer dollars, while the rest of us are expected to do our best and come up with whatever retirement savings we can scrape together, with or without a company match? Incidentally, do you think that these folks' pensions were reduced when the markets tumbled and the rest of us lost much of our retirement savings?

In California, $100K may not be excessive given the very high cost of living, and especially when such pensions are paid to high ranking former public servants, but some of the examples on that website are dramatically higher. How about some oversight? How about some sanity? Next time you are worried about your retirement savings, maybe you should consider working for the government... The rest of us will pick up the tab.

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Rebalancing My 401K

Planning for our retirement is very important to me and my wife and I have been religiously maxing out our 401K contributions every year. Since I joined my employer last April I have done nothing to re-balance my 401K investments, and as you can imagine, with all the market turmoil the asset allocation of my plan has gotten a bit out of whack. Yesterday I went on the Fidelity website to do some re-balancing.  

Re-balancing is a pretty simple process in which you bring your investments back into your desired asset allocation. Say you would like to have your assets invested 50% in stocks and 50% in bonds, but with stocks taking a major hit over the past couple of years your stock values fell by a half, while your bonds remain unchanged. While your overall portfolio has lost 25% of its value, stocks now account for only 25% of the remaining funds. When re-balancing you would sell some bonds and buy some stocks such that the new asset allocation matched your original investment targets of 50% in each asset class.

The idea behind re-balancing is the notion of "regression to the mean" - certain asset classes tend to yield certain returns over the long haul. If in a given year an asset class dramatically over performs or under performs, it is reasonable to expect that in the following years it will reverse the trend such that over the long term returns will roughly meet the historical average. When re-balancing you sell the assets that have done well and now account for a larger share of your portfolio than you intended, while buying some of the lagging asset classes that have done worse than they usually do. This serves two purposes: first, it ensures that your portfolio has the risk characteristics which you desire and second, it forces you to sell high and buy low. I have previously written a post on the subject of re-balancing if you are interested in more information (although my views on the subject have evolved somewhat since I wrote the post 2 years ago).

Anyway, Fidelity does a fairly good job of hiding its re-balancing services. However, it turns out that I did not need to manually re-balance the account. Fidelity offers an annual re-balancing option - although I would have preferred quarterly re-balancing. It also gives you the option of being alerted about imbalances in your asset allocation on a quarterly basis - however it will only alert you to substantial deviations in your relative asset balances, i.e. 10% or more. These re-balancing services are good enough for me. I signed up for annual re-balancing and it's nice to know that I no longer need to think about asset allocation in my 401K.

With that in mind, and following my post on the topic from yesterday, I am now going to start lobbying for a ROTH 401K plan to be adopted by my company and will also try to convince the powers that be to adopt childcare and medical flex accounts.

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