How To Boost Your 401(k) By 25%

A recently published study threatens to upend what we know about both 401(k)s and financial education.

The study, which is titled “Financial Knowledge and 401(k) Performance” and was published by the National Bureau of Economic Research, found that people with more knowledge about stocks and investing tend to achieve higher returns in their retirement accounts. By a lot. Of the individuals the study examined, those who knew something about investing were on track to have 25% more in their 401(k) at retirement than those who didn’t.

This may sound obvious, but it goes against much of what has become conventional wisdom about investing. Professional money managers presumably know more than the Average Joe. Yet mutual funds — and even hedge funds — regularly trail the market. Indeed, the widely cited advice to go with a passive index fund, rather than trying to pick individual stocks or go with someone who will pick them for you, is based on the belief that knowledge, when it comes to the market, doesn’t get you anywhere.

And 401(k)s, too, haven’t worked out as planned. The average account has just $89,300 in it. Not quite enough for retirement. And handing over control to individuals, the switch to 401(k)s from defined pension plans, hasn’t been so great, either. Numerous studies show the more you trade, the worse you do. And in the financial crisis, the accounts of the people who were closest to retirement did the worst. Not exactly how it is supposed to work.

I wrote a story a few years back looking at a company, the first I believe, that ditched its pension plan for a 401(k). The results were near universally terrible.


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