Hearing a lot of people lost all of their 401ks

[Cyrus]

I need to start working on setting up one, but I need to figure out how this works. So, any thoughts or links would be appreciated.

What are the risks, etc. I've been hearing a lot of people lost all of their 401ks. Any truth to this?

Side note: apologies for being the donkey by posting the overly broad and general thread.

 

[Evo]

I need to start working on setting up one, but I need to figure out how this works. So, any thoughts or links would be appreciated.

What are the risks, etc. I've been hearing a lot of people lost all of their 401ks. Any truth to this?

Side note: apologies for being the donkey by posting the overly broad and general thread.

If it was through your job, and you didn't choose wisely, yes.

 

[TheStatutoryApe]

I did not hear a lot about it but I heard that many company's 401ks were tied up in the bad loan investments either directly or indirectly.

From what I have heard, if you are trying to set something up on your own, it is better to look for a good mutual fund.

 

[chingkui]

it is impossible to lose everything unless you put all your money into your company's stock and your company goes bankrupt.

No matter what you invest, there is always risk. You have to decide what level of risk you can swallow before you couldn't sleep at night, and wisely choose what to and what not to buy. One word: diversify.

There are lots of free sites on the web you could learn from. If you have never been exposed to investment before, maybe you could try this:
http://www.morningstar.com/Cover/Classroom.html

 

[Cyrus]

it is impossible to lose everything unless you put all your money into your company's stock and your company goes bankrupt.

No matter what you invest, there is always risk. You have to decide what level of risk you can swallow before you couldn't sleep at night, and wisely choose what to and what not to buy. One word: diversify.

There are lots of free sites on the web you could learn from. If you have never been exposed to investment before, maybe you could try this:
http://www.morningstar.com/Cover/Classroom.html

Yes, very true. Thanks for the link. I'm in the process of working with my lawyer on employment contract negotiations, and learning about that as well.

 

[russ_watters]

I need to start working on setting up one, but I need to figure out how this works. So, any thoughts or links would be appreciated.

What are the risks, etc. I've been hearing a lot of people lost all of their 401ks. Any truth to this?

A 401k is a corporate savings plan that is tax-deferred, meaning you pay income tax on the money when you pull it out instead of when your company pays you. It is a way to reduce your tax exposure. And as an added incentive, businesses will generally match some or all of your 401k contributions, up to a certain fraction of your pay. Ie, mine will match up to half of 6%. So that's free money that I get just because I save. That's it. That's all a 401k is. What you do with that money to save it for retirement is up to you: the risk/reward is up to you.

So what you really need to learn about it investing itself. If you are insanely risk averse, put your money into a government insured, fixed-income security like a CD or a bond (or bond fund). If you are young and can afford some risk (I know you are young), stocks are the best choice. You should probably put a decent fraction of the money into something with a low-to-moderate risk, such as an S&P Index fund (far and away the most common/popular/successful), but there isn't much harm in putting some into a mutual fund with more risk/reward when you are young.

The choices are laid-out by your company in a packet they give you when you sign up for the 401k.

Some people have lost a very high fraction of their 401k's, but it takes a truly exceptional amount of stupidity/gullibility/neglegence to do such a thing.

 

[Cyrus]

A 401k is a corporate savings plan that is tax-deferred, meaning you pay income tax on the money when you pull it out instead of when your company pays you. It is a way to reduce your tax exposure. And as an added incentive, businesses will generally match some or all of your 401k contributions, up to a certain fraction of your pay. Ie, mine will match up to half of 6%. So that's free money that I get just because I save. That's it. That's all a 401k is. What you do with that money to save it for retirement is up to you: the risk/reward is up to you.

So what you really need to learn about it investing itself. If you are insanely risk averse, put your money into a government insured, fixed-income security like a CD or a bond (or bond fund). If you are young and can afford some risk (I know you are young), stocks are the best choice. You should probably put a decent fraction of the money into something with a low-to-moderate risk, such as an S&P Index fund (far and away the most common/popular/successful), but there isn't much harm in putting some into a mutual fund with more risk/reward when you are young.

The choices are laid-out by your company in a packet they give you when you sign up for the 401k.

Some people have lost a very high fraction of their 401k's, but it takes a truly exceptional amount of stupidity/gullibility/neglegence to do such a thing.

The thing is the company is small, i.e., me and two other people! So, I'd have to do my own investing and set it up myself with an investment broker (is that what you call them?).

In terms of the contract, it states that any ideas or patents I come up with belong to the company, but I had my lawyer take that out. I see no reason why that should be true in a three man company where I don't have any company share. I'm not trying to be greedy, my salary is fair. It's not great, but its not bad. I don't think I'm being unreasonable in gutting that from my contract.

 

[turbo]

Your investment options should be pretty well-established, Cy. The major advantage of a 401k is that your investment funds come out of your wages pre-tax, so that you don't have to pay federal, state, or local taxes on the wages that you invest. When you invest in mutual funds that are heavily reliant on stocks (international or domestic), you stand a good chance of losing value in every hard down-turn. It's not hard to lose tens of thousands in a down-turn, and it's a bit stomach-churning to ride it out and wait for enough recovery to regain that value. I lost a pile in the last few years, and took a lot of crap from cheerleaders on this forum who claimed (with no real justification) that we were not falling into recession. I'll come out of it OK, but I can't say the same for my co-workers who dumped all their 401k investments into real estate (crowing about their huge unsustainable gains) just prior to the the S&L collapse.

Invest in stable, well-managed funds and you will do OK over the long run. Good luck.

 

[Borg]

The thing is the company is small, i.e., me and two other people! So, I'd have to do my own investing and set it up myself with an investment broker (is that what you call them?).

If you're setting it up yourself with a broker, it sounds more like an http://www.finweb.com/financial-planning/types-of-iras.html" .

 

[Topher925]

I lost a large fraction of my 401k when the market tanked due it being managed poorly. I pulled out all the funds and put them in an IRA which right now I think is a better option. Unless your company offers investment matching, as in they throw in a few percent of what ever you do, I would look at other methods of investment.

 

[jobyts]

The thumb rule is
% of stocks = 110 - your age.

I usually put 100% in stocks though.

 

[russ_watters]

The thing is the company is small, i.e., me and two other people! So, I'd have to do my own investing and set it up myself with an investment broker (is that what you call them?).

Are you sure it is really a 401K then? As Borg says, if you're doing it yourself, it sounds more like an IRA. Though I once worked for a very small company and realize that having your company do it for you can be functionally the same as doing it yourself.

You probably need an accountant and/or tax lawyer to help you and your company get it figured out and set up properly. Or, there may be management firms for this purpose. Not exactly sure.

In terms of the contract, it states that any ideas or patents I come up with belong to the company, but I had my lawyer take that out. I see no reason why that should be true in a three man company where I don't have any company share. I'm not trying to be greedy, my salary is fair. It's not great, but its not bad. I don't think I'm being unreasonable in gutting that from my contract.

I don't think you're being unreasonable either, but congratulations on your freakishly large testicles.

 

[russ_watters]

I lost a large fraction of my 401k when the market tanked due it being managed poorly. I pulled out all the funds and put them in an IRA which right now I think is a better option. Unless your company offers investment matching, as in they throw in a few percent of what ever you do, I would look at other methods of investment.

Did your company not allow you to pick your own investments? I thought they had to.

 

[TheStatutoryApe]

In terms of the contract, it states that any ideas or patents I come up with belong to the company, but I had my lawyer take that out. I see no reason why that should be true in a three man company where I don't have any company share. I'm not trying to be greedy, my salary is fair. It's not great, but its not bad. I don't think I'm being unreasonable in gutting that from my contract.

This is something you'll probably have to negotiate. Since it sounds like a small start up they may be willing to compromise but the corporation will need rights (whether full or limited) to use your ideas. More than likely they will be the ones fronting the cash and finding a patent attorney in order to patent the ideas so they deserve something if they are going to be doing this. What sort of compromise you might be able to come up with I have no idea. Maintaining exclusive rights to any patents is going to be a necessity for them. You may be able to come up with some agreement where they must give you some percentage of profits for any idea you come up with that they patent.

Also remember that any intellectual property you produce always belongs to you, though you'll need to make sure your name is on the patent and cover yer *** incase they neglect to do this. As long as it is acknowledged as your idea all they can get is rights to use it. If they maintain exclusive rights then you will not be able to use it elsewhere or sell rights to anyone else but you will always be able to say "this is my work" "my name is on these patents" and they will not be able to do anything about it.

 

[turbo]

General comments: Companies that employ you mostly do not manage 401k investments. They hire a larger investment firm to handle that program, hopefully one with low maintenance fees and a decent reputation for selecting stable investment vehicles. Your employer takes your designated contributions (pre-tax) from your pay and hands it over to the investment firm to invest as you designate. Generally, the investment firm ranks the investments by risk and potential for loss and gain, and you choose your own portfolio. (pick your poison)

I had rolled all my 401ks into a single IRA and since I am not really old (not needing the money soon), I chose some high-risk funds, as well as some more stable funds. The high-risk funds lost me tens of thousands (on paper anyway) during the market plunge, though some of that is coming back. I could have rolled a lot of dough into bond funds, but given the current state of the US and EU economies, those would have stagnated or lost, too, with little hope for making large future gains, due to suppression of interest rates to prevent further collapse of governmental budgets.

 

[turbo]

BTW, when you are heavily invested in some funds, and the market turns, you have to have the guts to watch a year's worth of income disappear (on paper, at least) and ride it out. If you bail out and re-direct your investments after a large loss, you lock in that loss. Not a really savvy move. You have to think long-term or you will become fodder for the finance industry.

Once you get established with a decent financial firm, you will get access to a personal advisor. I have one at the Principal Group, and he either answers the phone personally or calls back promptly. No promises, but I have had really good experiences with that company. If you need to set up an IRA (as opposed to a 401k), PM me and I'll give you his phone number. He is really thorough, and much more forthright than the various 401k fund managers I have dealt with in the past.

 

[Cyrus]

Another side question. For a 3 person company, where I would be the third person, and the other two people have been at said company for 2 years, what would be a reasonable percentage to ask for, 1/3rd? 20%, 10%?

I'm thinking 20%. Keep in mind, the job only has money for a year. So if we do not drum up interest and get more funding, I'll have to find another one (which is a risk I'm willing to take).

 

[Moonbear]

I can only tell you my own approach, but different people will take different approaches to retirement savings due to different needs.

For me, my employer offers a 403b (or is it 403a...something like that), which is sort of the government employer version of a 401k. It's foolish of me not to use it, because they match a percentage of the contributions that I wouldn't get at all if I didn't use that fund. So, even if I earn no interest whatsoever on it, there's money in there I would not earn otherwise.

However, just to hedge my bets, I have a separate IRA in a different investment fund independent of my employer's fund. The IRA is the rollover of benefits from my previous employer. I could have left them in that employer's benefit plan, but I didn't like the performance of that plan at all. I could have rolled it over into the current employer's plan, but after feeling "stuck" with the previous employer's plan for so long, I was glad to have an out where I could put the money where I had more control over it and can move it to a different investment if I don't like how the one it's in is doing. My other reasoning in doing this is that if one fund is mismanaged, I always have the other as backup.

I don't personally know anyone who lost all their funds if they were in a 401K or other IRA type investment. Many lost a lot, but probably none lost so much that they still weren't better off having their money in an IRA type investment rather than not invested. For some who are close to retirement age, the major effect is they postponed retirement a year or two to give their investments time to recover. They are hardly risking being destitute or anything like that, it's more that they had planned their investments to maintain their current lifestyle and if they retired with the losses, would have probably needed to scale back, but still would be well off.

 

[russ_watters]

Another side question. For a 3 person company, where I would be the third person, and the other two people have been at said company for 2 years, what would be a reasonable percentage to ask for, 1/3rd? 20%, 10%?

I'm thinking 20%. Keep in mind, the job only has money for a year. So if we do not drum up interest and get more funding, I'll have to find another one (which is a risk I'm willing to take).

I'm not following - 10% or 20% of what?

 

[Cyrus]

I'm not following - 10% or 20% of what?

Of the company's value in equity. I was told by a friend who has his own company that its not unreasonable to ask for (your salary)/(company worth) in terms of stock. I'm thinking of asking for 15-20% right off the bat.

 

[russ_watters]

Of the company's value in equity. I was told by a friend who has his own company that its not unreasonable to ask for (your salary)/(company worth) in terms of stock. I'm thinking of asking for 15-20% right off the bat.

Ok, but that doesn't really have anything to do with a 401K...

...and good luck with that. I wouldn't think in a small company that the employees should get anything. This isn't an IPO: the guys who own the company are the guys who invested their own money to start it and have all the risk if it fails or gets sued.

 

[Cyrus]

Ok, but that doesn't really have anything to do with a 401K...

Yeah, sorry about that. Split issues here.

...and good luck with that. I wouldn't think in a small company that the employees should get anything. This isn't an IPO: the guys who own the company are the guys who invested their own money to start it and have all the risk if it fails or gets sued.

The company is an LLC. The money they used was generated from state funding for small startups, not second mortgages on their own house. That being said, in combination with the fact that I would be one of two people that have the technical expertise, I see no reason why I shouldn't have a large stake in the company. Essentially, my hard work would generate more money to keep us funded after this year - otherwise we shut down. I would say I should get a very large slice of the pie for that. 20% of 0, is still 0. It really boils down to this: when you're talking about a 3 -man operation, you better have some form of an incentive for me to want to work for you. I'm not going to make you rich out of the goodness of my heart.

 

[rootX]

Congratulations for finding this job! I think it's wonderful opportunity to find a place like this while risk is high but here are so many opportunities. Even when everything fails, you come out very strong and skillful because you would be involved in all aspects of the business. I had similar opportunity at the end of my first year but I did not find it interesting and did not have motivation to involve in other things beside my main tasks. I moved to bigger company after spending 8 months there as an intern, now I want to go back/find another start up.

 

[Cyrus]

Congratulations for finding this job! I think it's wonderful opportunity to find a place like this while risk is high but here are so many opportunities. Even when everything fails, you come out very strong and skillful because you would be involved in all aspects of the business. I had similar opportunity at the end of my first year but I did not find it interesting and did not have motivation to involve in other things beside my main tasks. I moved to bigger company after spending 8 months there as an intern, now I want to go back/find another start up.

No, this is exactly my problem. I'm absorbing an astronomical amount of risk (if you saw the actual agreement), for absolutely little to almost no potential gains (maybe 3% share after a year)!

When we talked previously, it seemed all good. When I got the actual contract, I said no way am I agreeing to this.

 

[russ_watters]

No, this is exactly my problem. I'm absorbing an astronomical amount of risk (if you saw the actual agreement), for absolutely little to almost no potential gains (maybe 3% share after a year)!

Could you give us at least some clue as to what you mean here because it really doesn't make much sense and it sounds like you think working for a company generally entitles an employee to a share of owership. That just isn't the case. The vast majority of employees of the vast majority of companies have one source or risk and one source of gain:

Risk: The company can fire you at any time.
Gain: The company pays you every other week.

That's it. Few people ever get equity in a company they work for.

 

[Cyrus]

Could you give us at least some clue as to what you mean here because it really doesn't make much sense and it sounds like you think working for a company generally entitles an employee to a share of owership.

I wouldn't go that far. What I am saying is that if your taking the risk to work at a startup from the very beginning (first employee), for lower pay, no job security, giving up patent rights, then in that case, yes, it seems very reasonable to have a stake in the company. Otherwise, why the hell even bother being at said company? I can walk away to a higher paying job with great benefits elsewhere (which is an option I do have).

The vast majority of employees of the vast majority of companies have one source or risk and one source of gain:

Risk: The company can fire you at any time.
Gain: The company pays you every other week.

That's it. Few people ever get equity in a company they work for.

Most engineering jobs usually have a 6 month probation period, after which its usually harder to get rid of you unless you do something major or the company looses major funding - much different than a startup, which has higher risk. You are also missing the basic point that in a larger company, gains you give to the company come back to you too. I.e., if you bring in a new employee, you get a bonus. If you do good sales, you get a bonus, etc, etc, etc - as opposed to a startup which is strapped for cash (don't expect bonus', can't give something you don't have - money). But you can give a 'promise' of future money.

 

[russ_watters]

What I am saying is that if your taking the risk to work at a startup from the very beginning (first employee), for lower pay, no job security, giving up patent rights, then in that case, yes, it seems very reasonable to have a stake in the company.

Well, you can try that argument with your boss, but don't expect it to get much traction. There are certain whole industries such as architecture and construction engineering where a huge fraction of the workforce accepts exactly that type of risk. Even in larger companies, the industry is cyclical and you can just about expect that on average, 20% of your company will be laid off every 8 years or so. The risk is inherrent with the type of industry.

Otherwise, why the hell even bother being at said company?

Because unemployment is 10% and the risk is greater if you quit. Additionally, being in on the ground floor gives you seniority for when the company does grow. As an engineer who was the third employee in my last company (and first engineer employed), I had no illusions about the risk I had, but I also gained experience I wouldn't have gotten elsewhere (which serves me well now) and had an inside track to becoming a partner with an ownership share...in, say, 10 years.

I can walk away to a higher paying job with great benefits elsewhere (which is an option I do have).

If you really provide that much value, the company should pay you accordingly, but don't be surprised if they don't value you as much as you value yourself.

Most engineering jobs usually have a 6 month probation period, after which its usually harder to get rid of you unless you do something major or the company looses major funding...

Those are both significant risks at any engineering based company.

You are also missing the basic point that in a larger company, gains you give to the company come back to you too. I.e., if you bring in a new employee, you get a bonus. If you do good sales, you get a bonus, etc, etc, etc -

New employee incentives look great in the employee manual, but few people ever see them. A sales bonus is for a salesperson and with that comes, again, a much higher risk and lower base salary.

But you can give a 'promise' of future money.

Agreed, but the promise of future money need not be based on equity.

 

[Ronnin]

Cyrus, for this equity stake you are considering taking, what kind of control are you going to have over operations? Do you really want to become a de facto partner/owner? If you do enter into this partnership be sure your contract is IRON CLAD. Remember, if you become a partner you are fully liable for 100% of any liabilities incurred. If you see a considerable upside here it might be worth considering but ownership brings about a whole new set of headaches you may not be interested in, so be sure that is what you want.

 

[turbo]

Cy, negotiate for incentive pay based on performance if you can. If you demand ownership percentages, you lose some flexibility in your future job moves (and if you are like 99.x% of people, you will move). If the payment of bonuses has to be deferred based on cash-flow problems on the part of the company, see if you can negotiate repayment in a preferred situation, such that you get paid first if the company files bankruptcy. If you are a part-owner, such an arrangement might not be possible or legal. As a contractor or employee, you might be able to get such preferred treatment, though you'd need to consult an employment-law attorney in your state to be sure.

 

[Cyrus]

So I talked this over with my dad, my contract lawyer, and some financial advisors (woohoo, free advice from them over the phone!). I *could* ask for 10-20%, but that's asking for a slice of their pie (plus, I don't want to come off looking like a horses ***: what's that you say? Cyrus, how could you *possibly* come off as a horses *** - you, no, never! I know, let's just imagine for the sake of the example.). So instead, my dad said I should ask for a % of all revenue generated from patent ideas I come up with, which I think is a very good alternative. If I come up with a good idea, I make a lot of money (and so does the company). If I come up with nothing, I don't get anything and cost the company nothing. I will negotiate this into my contract. If he is not willing to give me a % of money from my patents, I walk - end of story.

 

[russ_watters]

I agree that profit sharing is a good alternative - just make sure you have that other solid job offer in-hand before you walk!

 

[Cyrus]

I agree that profit sharing is a good alternative - just make sure you have that other solid job offer in-hand before you walk!

The other company, in San Diego, loved me so much they said I could call them up a year later and they'd open a position for me - and they are great folks.

So my new question is, what is a reasonable figure to ask for. I'm thinking 30-50%.

 

[russ_watters]

No, I wouldn't ask for a higher share than the owners of the company! I'd think maybe half of their share, so, perhaps 1/5th: 20%.

And I wouldn't trust a year-old promise that had no teeth when it was made, either: ask them first!

 

[Cyrus]

No, I wouldn't ask for a higher share than the owners of the company! I'd think maybe half of their share, so, perhaps 1/5th: 20%.

And I wouldn't trust a year-old promise that had no teeth when it was made, either: ask them first!

Well, the promise was a few months ago, and would extend until a year from now (or two). It was the boss of who would be my boss that told me this (division head). We had an hour long phone conversation.

I'm going to shoot for 30%, and see what he's says. But if he declines any profit sharing on patents...not a sign of good faith.

 

[Vanadium 50]

So my new question is, what is a reasonable figure to ask for. I'm thinking 30-50%.

Of the revenue?

With all due respect, you're so far out of the ballpark as to not even be on the same continent. 50% of the revenue means that the price of the item has to double to pay your share.

Typically established companies have profits of around 10% of revenues. So you're asking for five times as much money on your product as the shareholders get.

Of course, you can get whatever you manage to negotiate. The other side of this coin is that the company is free to decline your services and look elsewhere.