A 401k FOR DUMMIES:

Trouble With Choices (Sebastian Mallaby, December 20, 2004, Washington Post)

The economics of Social Security privatization get plenty of attention: how to think about transition costs, the effect on national savings, the risk of equity investment. But the political philosophy of privatization is often taken for granted: It's just assumed that, if the economics were neutral, people would be happier with private accounts than with a public program. Do we really know this to be true? Is an "ownership society" preferable to a "big government" one?

People want control over their lives; they value their freedom. But the first reason to wonder whether "ownership" is always good is that it can be stressful. It may be true, as promoters of ownership like to say, that nobody ever washed a rented car; but renters are very happy not to have to get the hose out. If it's up to you to choose how to invest your pension account, agonizing over health stocks vs. Asian bonds may not be such a privilege.

It's not just that financial planning is a dry topic to most folks. It's that modern life is overloaded with choices. In "The Paradox of Choice," the Swarthmore College psychologist Barry Schwartz shows how a certain measure of choice can be liberating but how too much is a treadmill -- sometimes even triggering depression. Freedom and choice are wonderful things that allow us to realize our human potential. But there's a limit to how many choices each of us has time to make, and most people in the rich world are pretty much maxed out already.

Which is why these accounts won't have many choices and will need defaults based on your age. You should be allowed to choose a different option, but the immediate decision should be made for you. And you should not have a choice about being shifted into the more conservative option as you approach retirement age.

Posted by Orrin Judd at December 20, 2004 5:53 PM