Options are valuable

Many people lost a great deal of money in their 401K accounts lately. Again, they cry for the return of traditional defined-benefit plans. In essence, they do not want to have options, do not want to bear the risk of investing their own money, and do not want to reap the fruit of investing their own money. I believe that people's limited capability of dealing with big amount of information is one of the reasons why the liberals think the government should intervene with people's daily life. We see this argument in many places, such as the choice of schools, the labeling of drugs, and the use of guns. We economists call this as the market failure. In some occasions, I think the argument is valid and government intervention is indeed needed. But more likely than not, it is only a disguised way for the government to extend its power. We should object to that. In the case of 401k, it is particularly obvious.

What is a defined-benefit plan? It is a retirement plan that gives you a fixed amount of pension when you retire, either through a lump-sum payment or monthly installments. It is just a annuity, for Christ's sake! If you really like the annuity so much, just put all your 401k in an annuity account. If there is not an annuity option available to your 401k plan, well, I see a business opportunity! No laws say that you can't put your 401k in annuities. If your company's financial adviser does not have annuities, just call them three times a day! Soon enough, you will get your traditional pension back.

Options are valuable. I'd said that to my students in my investment class. And you should always keep this in mind as well. A 401k plan is better than traditional pensions because it gives you options. If you don't like varieties, that is fine. Just pick the most conservative one from your 401k menu. But never give your valuable options away!

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