How should I diversify my 401k

401 (k)

401 (k), 401k or 401k plan refers to an employer-co-financed private pension model in the United States. The model owes its name to its anchoring in section 401 (k) of the Internal Revenue Code, the main part of US tax law. In 2016, 55 million Americans had retirement benefits through 401 (k) programs.[1]


Advantages and disadvantages

From the employee's perspective, the plan has the advantage that the taxation of money is shifted into the future. Compound interest can work unhindered and large sums of money can come together over the course of several decades. As of the end of 2019, over 200,000 of the active 401 (k) plans were worth more than $ 1 million.[7] In addition, the system allows the individual citizen to decide how risky his investment should be. The investment strategy is not fixed and can be changed at any time.[5] A 401 (k) plan also allows the employee to flexibly increase or decrease payments depending on their personal situation. In addition, the process is very transparent, as every citizen can find out about the content and status of his or her old-age provision at any time.[5]

For the state, 401 (k) plans have the advantage that the system of state pensions and retirement provision is relieved by the private provision. In contrast, there are losses in income tax.

A disadvantage for employees is that substantial parts of their own assets are not available in liquid form. Before the age of 55, the funds in the 401 (k) plan are inaccessible or difficult to access.

A common criticism of 401 (k) plans is that laypeople without basic knowledge of the stock market have to make far-reaching investment decisions for their own retirement savings. A 2002 study showed that more than 8 million savers had more than 20% of their 401 (k) savings invested in their own company's stocks.[8] They underestimated the risk of an insufficiently diversified portfolio[8] and consequently, in the event of default, risked losing large parts of their retirement savings. An extreme example is the bankruptcy of the Enron company in 2001. 47% of employee savings were invested, in some cases exclusively, in the company's own employer's shares. In the course of the bankruptcy, the share price dropped from over $ 80 per paper to a few cents. Some of the savers suffered a total failure and lost their entire private pension scheme.[9]

Research suggests that even negative examples like Enron have little impact on saver behavior. Despite the intensive media coverage, little changed in the behavior of other 401 (k) investors:

“The current paper ads grist to this mill by showing that a year of headlines about decimated 401 (k) accounts did little to drive investors out of employer stock. Our estimates suggest that the media publicity surrounding the Enron / Global Crossing / WorldCom bankruptcies reduced the fraction of 401 (k) assets held in employer stock by at most 2 percentage points, from 35% to 33%. ”

“The present paper is grist to the mill of this debate, as it has been shown that years of headlines about decimated 401 (k) accounts have done little to encourage investors to place less trust in their employers' stocks. Our estimates suggest that media coverage of the bankruptcies of Enron, Global Crossing and WorldCom reduced the company's own employer's share of shares by a maximum of 2 percentage points, from 35% to 33%. "[10]

Reception in Germany

There are repeated calls to promote private, capital market-oriented old-age provision in Germany.[11] 401 (k) would be such a model. The Scientific Service of the German Bundestag, however, considers the extensive introduction of a 401 (k) model in Germany to be "implausible":

"A complete transfer of the old-age pension programs tailored to the USA to Germany does not seem plausible, if only because of the different social security systems."[1]

Individual evidence

  1. abc401 (k) and Roth IRA retirement programs in the United States. (PDF, 227kB) Scientific Services of the German Bundestag, August 7, 2019, accessed on February 17, 2020.
  2. ↑ Kathleen Elkins: How much money Americans have in their 401 (k) s at every age.CNBC, May 23, 2019, accessed February 18, 2020.
  3. ↑ Michael Ferber: Private provision is becoming more and more important.Neue Zürcher Zeitung, June 20, 2018, accessed on February 17, 2020.
  4. abcPembe Bilir and Tanza Loudenback: 26-year-old with 130,000 euros in his account says: This is the best investment of my life.Business Insider, December 15, 2019, accessed February 17, 2020.
  5. abcdeGottfried Heller: Germany’s old-age provision has to become even smarter.Die Welt, April 15, 2016, accessed February 17, 2020.
  6. abBeatrix Wirth: Private pension provision as a normal case.Die Welt, December 6, 2001, accessed February 18, 2020.
  7. ↑ Jessica Dickler: The number of 401 (k) millionaires hits a fresh high.CNBC, November 14, 2019, accessed February 18, 2020.
  8. abAlicia Munnell and Annika Sundén: 401 (K) s and Company Stock: How Can We Encourage Diversification? (PDF, 117kB) Center for Retirement Research at Boston College, July 2002, accessed on February 21, 2020 (eng).
  9. ↑ Carsten Volkery: The fraud of millions against the pensioners.Spiegel, December 21, 2001, accessed February 22, 2020.
  10. ↑ David Laibson and Brigitte Madrian: Are Empowerment and Education Enough? Under-Diversification in 401 (k) Plans. Brookings Papers on Economic Activity, February 2015, accessed February 22, 2020.
  11. Friedrich Merz calls for shares for everyone.Die Welt, June 11, 2019, accessed on February 18, 2020.