Pension Reform Bill Saves the Stock Market
Today President Bush signed into law a bill that is designed to encourage 401K participation. There are many good points to this bill and estimates are that it will increase the number of people participating in retirement plans. The numbers are still foggy but you are looking at anywhere from 30% to more then double the current number of 401K investors.
Stocks rarely trade at what the company is worth. They generally trade at what people think they are worth – to a point. If you recall your basic Econ 101 classes, then you’ll realize that soon demand for stocks should start to rise as more new investors will be forced into the market. Mutual fund managers will have a wonderful problem of excess capital flowing in.
For those of us already in the market, and I hope that is everyone reading this site, it should be a good ride ahead. I am hopeful anyway.
Further Reading: Pension reform - Boon for 401(k)s by Jeanne Sahadi
In addition to writing for InvestorGeeks, Kevin Hamrick also does analysis at HipEgg under the pseudonym Jym Khana. In his distant past, Kevin worked for 2 brokerage houses and a regional bank. He now makes his living as a defense contractor developing software.
6 Comments Add your ownSubscribe
1. Jason | August 18th, 2006 at 7:16 am
This is great news for the bulls, for anyone how is long in this market. A lot of folks believe that the introduction of 401ks (not the blooming of the Internet age) was the real reason for the great bull rally of the 90s.
In any case, Kevin’s thesis is reasonable: that money has to go somewhere. I guess we could still see a bear market in securities if folks decide to go with fixed-income funds. But that doesn’t really sound like the style of the typical employee. I had to choose which funds my money went into when I setup my 401k, and I wasn’t going to invest in no wussy fixed-income funds.
Of course, if the setup of my 401k was automatic, maybe they would choose safer selections as the default.
And last, but not least, doesn’t this sound like something the Plunge Protection Team would have their hands in.
http://en.wikipedia.org/wiki/Plunge_Protection_Team
I’ve been hearing about them a lot lately. Someone should create a PPT indicator that charts the number of PPT occurrences against the performance of the market.
2. Kevin H | August 18th, 2006 at 3:44 pm
Good points Jason! You are entirely correct that the default would probably be some form of money market fund. I had not thought of that because, like you, I wouldn’t put the bulk of my money in one. Regardless, some percentage of those new employees entering the 401K world will take it seriously once it is forced on them and pick equities. Still others will opt for the more secure accounts and complain about the lack of growth while others will surely opt out.
A good question is “What impact will we see from those people entering the bond market?” I’m not sure myself and we can only guess what the percentages would be.
As for the PPT, yes, there is no doubt that this move has multiple benefits. Privatizing social security failed so maybe this is the back up plan. Another interesting point to tie all these together; what is the considered the most secure investment? The ‘default’ fund would probably be a government bond fund.
How will the influx of money into government bond funds affect things? It is interesting to ponder but maybe we will finally be able to pay off the war.
3. Phil John | August 18th, 2006 at 7:13 pm
…
“great ride ahead”?
Disappointing article. Why did you not include more specifics?
How about you write about the effect all the baby boomers WITHDRAWING money to live will have on the market. They are starting to retire now, which suggests they may offset any increase in contributions from those of us on less money.
Most baby boomers are in their prime earning years, with the highest wages they will ever earn, and are socking away as much money as possible for retirement. That is going to stop in the next 10 years, and the smaller number of GenX will not be putting as much away.
GenY are still too young and more worried about a house and/or living it up to be making large contributions.
Unless this is compulsory, I don’t see drastic changes. If people don’t realise the benefits of 401ks now, they aren’t likely to change in the future. If they do, then they are already putting as much money away as possible. Unless the contributions are huge, I don’t see them propping up an ailing economy, which ultimately is the driver of stock prices.
Regards,
Phil
4. Chris | August 19th, 2006 at 8:58 am
Baby Boomer’s were the group of people born between WWII and roughly 1960. That’s my father’s generation. I’m Gen Y which is roughly 1980 to 2003. This puts Gen X in the prime of their working lives, and Gen Yers just entering the working force within the last few years.
As it turns out, although the parent’s of the Baby Boomers did in fact have a larger than usual birth rate, as it turns out Baby Boomers and Gen Xers still have had relatively strong growth rates. Although growth has indeed slowed, it is still much faster than pre-War rates. (Take a look at the Population Charts article at About.com.)
Just as each year there will be more and more older citizens drawing from their pension plans, there are a few points to be made here:
1. The withrdrawl rate will be slow. They will not draw out all their retirement funds at once.
2. There are more people in the working force than leaving it still. Don’t forget that the Baby Boomers are not nearly all retired yet. They are mearly just entering retirement now.
3. Although there is slighltly more 45-49 year olds than there are in other age categories, this is nothing the economy cannot bear and as long as the population of the US doesn’t experience an inverted pyramid, we’ll continue to have the same or slighly increased population in new age groups who will eventually support higher, less populous levels of the population heirarchy.
Explosions in populations only affect the economy during the various transitional periods. Once a program is fixed to adapt to the new population level, then smooth sailing is ahead.
I would also be willing to bet that younger generations will have higher participation rates in retirements plans than baby boomers over the long run, as they make the mental shift from pension and social security to defined contribution plans.
5. Where Are Vanguard Funds &hellip | September 4th, 2006 at 11:38 pm
[…] The Winds Of Change The U.S. Senate recently passed the Pension Protection Act of 2006. Fellow InvestorGeek Kevin Hamrick had previously posted on the event. The new legislation makes it easier for retirement plan sponsors to offer investment advice to plan participants. Employers can implement auto-enrollment, and automatic increases in contributions; making employees opt-out rather than opt-in. There were also the obligatory updates to contribution limits. […]
6. Where Are Vanguard Funds &hellip | September 13th, 2006 at 7:32 am
[…] The Winds Of Change The U.S. Senate recently passed the Pension Protection Act of 2006. Fellow InvestorGeek Kevin Hamrick had previously posted on the event. The new legislation makes it easier for retirement plan sponsors to offer investment advice to plan participants. Employers can implement auto-enrollment, and automatic increases in contributions; making employees opt-out rather than opt-in. There were also the obligatory updates to contribution limits. […]
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