Financial institutions have a distinct genius for marketing. They
are able to get millions of Americans to hand over their money with
very little thought taken, very little knowledge of the so-called
investments offered, and even less control of their investments.
When
the evidence is plainly presented, it becomes overwhelmingly clear that
putting money into 401(k)s and similar qualified plans is not investing
at all–it is one of the riskiest gambles for most individuals. Read
the following reasons why I say this, and ask yourself if it’s time to
reconsider your 401(k).
1. Limited Opportunity For Cash Flow
Qualified
retirement plans, such as 401(k)s and IRAs, do not provide immediate
cash flow, which means that you cannot benefit from them through
velocity and utilization. The theory is that letting the money sit
allows it to compound, but for most people this really means that it
stagnates. Most people will not choose to utilize these funds even when a
particularly compelling opportunity arises that will make them far more
than the 401(k) would, even accounting for the penalties. This means
that numerous legitimate opportunities are passed by as people stay “in
it for the long haul.”
2. Lack of Liquidity
The money
is tied up with penalties attached for early withdrawal. Although there
are a few technicalities that allow penalty-free withdrawals, the
restrictions are so numerous that very few know how to get around them.
3. Market Dependency
The
performance of the funds is dependent upon market factors that most
individuals do not have the knowledge nor the ability to understand or
mitigate. This means that your retirement plans are based on unknowable
projections, making for a dangerous and uncertain planning environment.
Uncertainty causes fear, and fear leads to mistakes, worry, scarcity,
and ultimately lost hopes and dreams. Do you want to live your ideal
life only if the market cooperates?
4. The Match Myth
“Take
the match–it’s a guaranteed 100% return before you even get started in
the market!” You’ve heard that before, right? The problem is that it’s a
complete myth–were it true most 401(k) savers could end up with
literally billions of dollars at retirement. What is the true impact on
the bottom line to you? When do you utilize the match?
5. Lack of Knowledge
How
much do you really know about your 401(k)? Do you know what happens to
the money? Do you know what funds you’re invested in? Do you know the
companies that your funds are invested in? Have you seen financials for
these companies and do you know their key executives? Do you know the
fund manager by name, her history, her investment philosophy, her
performance? How can you expect to gain a return from something you know
so little about? How can you create real, tangible value in the world
in the 401(k) scenario? And how can this be called investing? Without
full knowledge of an investment, placing money amounts to little more
than gambling, which is the desire to get something for nothing. The
“something-for-nothing” attitude–no matter now subconscious–is
exceedingly destructive.
6. Administrative Fees
The
funds are subject to various administrative fees in addition to expense
ratios and 12-b1 fees (for marketing expenses). This is a fact which
most people and even many advisors ignore. This means that your returns
will be negatively impacted and your projections can be substantially
off.
7. Under-Utilization Because of Tax Deferral
If
you don’t like paying taxes today, why would you want to pay them any
more in the future? In other words, the tax deferral aspect, which is
touted as a great boon, is actually a primary factor contributing to
qualified plan money being notoriously under-utilized. Most retirees let
the money sit, even during their retirement years, for fear of
triggering tax consequences. If you just have to pay the taxes as a
later date how is it a tax advantage? The reason there is no tax paid is
because you have deferred income by never taking constructive receipt
of your earning and instead deferring them into a qualified plan.
8. Higher Tax Brackets Upon Withdrawal
Closely
related to the previous problem, the other issue with taxes is that
most advice fails to take into consideration the likelihood of you being
in a higher tax bracket during your retirement years than you were
previously. Think about it: If you have achieved any measure of success
living the accumulation theory, you should actually be in a higher tax
bracket at retirement, although most advisors project that you will be
in a lower tax bracket. So this means that deferring your taxes results
in a far greater tax burden than would otherwise be incurred using
different products and strategies than the conventional route. It’s
profound irony that people project healthy returns on their qualified
plan while also projecting that they will be in a lower tax bracket at
retirement.
9. Estate Taxes
401(k)s are sitting ducks
for estate taxes. Much qualified plan money is never utilized by those
who actually accumulated it because they hold off so long on withdrawing
it in fear of paying taxes, yet when the money is passed on to the next
generation, there is not only an income tax that can be triggered, it
may be subject to an estate tax that there is no internal provision to
avoid either. So when the money is passed to the next generation, the
government taking a healthy chunk before it passes hands. This begs the
question of who is the real beneficiary of the program.
10. No Exit Strategy
Getting into a
401(k) seems simple enough. In fact, many companies start employees’
401(k) contributions automatically upon hiring them. They sound
great–you’re getting a match, tax deferral, a wide choice of funds
relating to your risk tolerance. But how are you going to get out of it?
How many people take this into consideration when they start
contributions? How many people understand the penalty and tax
consequences? Most people don’t fully realize the implications until
it’s too late, and so their qualified plan money sits unutilized. In
that case, what is the real rate of return of your money? Once again, in
that scenario, who are the real beneficiaries? Not them, and not their
heirs to a large extent–it’s the institutions and the government.
11. Subject to Government Control and Change
Did
you know that your 401(k) does not even technically belong to you? Read
the fine print and you will find that it is what’s called an “FBO” (For
Benefit Of). In other words, it’s technically owned by the government,
but provided for your benefit. It’s essentially a tax code. If history
proves to be a reliable guide, 401(k) funds are therefore in great
jeopardy. In the same way that the government raises and lowers taxes at
their whim, what is to keep them from changing the rules and taking the
money that you so diligently saved?
12. Golden Handcuffs
Are
you at your current job because it aligns with your passions and
purpose, or because of the great benefits? Are you just holding on long
enough until your qualified plan funds are fully vested? Are there ways
that you could create more wealth and opportunity by living your Soul
Purpose, rather than being attached to the deceptive security of a
401(k)?
13. Disinvesting
Suppose you’ve retired and
want to begin taking interest payments from your qualified plan. You
project that you can withdraw 6% a year, based on an average return of
8% a year. However, what happens to your principal when the funds are
volatile and the market experiences down years? Your funds may be
receiving an average 8% annually, but that means that some years will be
lower, some will be higher. If in one year your fund is down 10%,
you’re tapping into your principal to take your interest withdrawal. At
that point, you have only two choices: 1) start withdrawing principal,
or 2) leave the money alone until your funds are up again.
14. No Holistic Plan
I’ve
witnessed on many occasions people whose finances are in shambles and
although they have much more pressing needs, they diligently contribute
to their 401(k). They’ve been convinced to do so, of course, because of
the match, tax deferral, etc. It’s like a person trying to take care of a
scraped knee when their wrist is slit. What they really need is a
macroeconomic approach to their finances that will help them identify,
prioritize, and manage all pieces of their financial puzzle, with all
pieces coordinated and working together.
15. Neglect of Stewardship
Ultimately,
the most destructive aspect of 401(k)s is that they cause many
individuals to abdicate their responsibility, abandon self-reliance, and
neglect their stewardship over their own prosperity. People think that
if they just throw enough money at the “experts” that somehow, some way,
and without their direct involvement they will end up thirty years
later with a lot of money. And when things don’t turn out that way they
think they can blame others–despite the fact that they only have
themselves to blame.
Conclusion
Qualified plans are
promoted on such a wide scale because those promoting it have vested
interests–and their interests don’t necessarily coincide with yours.
If
you currently contribute to a 401(k), stop and think about it for a
minute. What is it really doing for you, now and in the future? The
desire to save money for retirement is wise and prudent, but after
reading the above, do you think it’s possible to find other investment
philosophies, products, and strategies that would meet your financial
objectives much more quickly and safely than a qualified plan?
Are
you really comfortable exposing yourself to this much risk? How can you
mitigate your risk, increase your returns, and create safe and
sustainable investments? How can you create more control and better exit
strategies, reduce your tax burden, and increase your cash flow?
Your financial future depends on your answers to these questions.
