“We weren’t social visionaries.”
Those are the words of Herbert Whitehouse, a former human resources executive at Johnson & Johnson who was one of the first to usher in the 401(k).
“It was oversold.”
Those are the words of Gerald Facciani, the former head of the American Society of Pension Actuaries. He helped defeat an effort by the Reagan administration to kill the 401(k) in 1986.
The misgivings of the early proponents of the 401(k) are chronicled in a bombshell article from the Wall Street Journal, The Champions of the 401(k) Lament the Revolution They Started.
According to the article:
Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence as the dominant way most Americans save. Some say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days.
Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers while making it easier for companies to shed guaranteed retiree payouts.
Before you get to the rest of today’s article, there is a MASSIVE development in the markets you need to be aware of. It could have big consequences for your retirement.
My colleagues recorded a quick emergency video clip to make sure you know exactly what’s going on.
Because according to their research, all signs point that we could be just days away from one of the largest stock market sell offs in history.
Why So Many People Lose
In my opinion, one of the reasons millions of people lose trillions of dollars is because they are looking for easy answers as to where to invest their money. And there are many people ready to supply the easy answers, such as:
- “Save money.”
- “Invest for the long term and diversify.”
- “Cut up your credit cards, and get out of debt.”
People with a job who put money into a retirement plan such as a 401(k) filled with mutual funds are taking the slow bus through life. It’s a bus with a worn-out engine. It doesn’t go fast and doesn’t ever reach the peaks of financial returns. It is a bus that has bad brakes, so going down hills is frightening.
While putting money into a retirement plan for the long term might be a good idea for average investors, to me, it is a slow, risky, inefficient, and highly taxed way to invest.
When it comes to investing and building a solid retirement, people blindly turn their money over to people they believe are financial experts: people such as bankers, financial planners, and stockbrokers — usually through a financial vehicle for retirement such as the 401k in the US.
Most of these so-called experts are not really investors in the true sense of the word — the big I quadrant in the CASHFLOW Quadrant. Most are instead in the E quadrant, working for a paycheck, or self-employed financial advisors in the S quadrant working for fees and commissions. Most “experts” can’t afford to stop working simply because they don’t have investments working for them.
Not Just the Poor Fall for 401k Plans
To be clear, this is not a poor person or a rich person’s problem. Both the rich and the poor give their money to these “experts.” This is because having a lot of money doesn’t make you financially intelligent. Many high-paid employees have no idea how to manage their money and many lose a lot of money because of it. That’s why Warren Buffett said, “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”
If people don’t have a sound financial education, they can’t tell if a financial advisor is a salesperson or a con artist, a fool or a genius. There is nothing wrong with being a salesperson. We all have something to sell. Yet, to quote Buffett again, “Never ask an insurance salesman if you need insurance.” When it comes to money, there are many people desperate enough to tell and sell you anything, just to get your money.
Interestingly, the vast majority of investors never meet the person taking their money. In most of the Western world, employees simply have their money automatically deducted from their paycheck into retirement plans like a 401k, the same way the tax departments collect taxes.
Retirement plans like the 401k go by different names in different countries. For instance, in Australia, they are called superannuation plans, and in Canada, they are known as RRSPs. But they all share one thing in common, your employer takes money out of your paycheck and hands it over to a broker you’ve most likely never met to manage one of the most important things for your future — your retirement.
And they’re all possibly the worst way to invest.
Why 401k Plans Are the Worst Investments for Retirement
I say the 401k is possibly the worst way to invest for retirement for the following reasons:
- Taxes work against you with a 401k plan: Long-term capital gains are taxed at a lower rate of around 15%. But the 401k gains are taxed at the ordinary earned income tax rate, which is much higher and the highest tax rate of the three types of income: Ordinary earned, portfolio, and passive.
- 401k and the early withdrawal penalty: If you want to take money out of your 401k early, you’ll have to pay a 10% penalty. That’s right. The government doesn’t trust 401k investors enough to even let them manage their own money how they want. Once it’s in, it stays in…or it will cost you.
- You have no insurance if there is a stock-market crash: To drive a car, I must have insurance in case there is a crash. When I invest in real estate, I have insurance in case of a fire or other losses. Yet the 401k investor has no insurance to prevent losses from market crashes.
- The 401k is for people who are planning to be poor when they retire: That is why financial planners often say, “When you retire, you’ll be taxed at a lower tax rate.” They assume you’ll make less money when you retire and thus be in a lower tax bracket.
So Why Are They So Popular?
They’re easy, for one. But the main reason is that those who run these plans make a lot of money off your money. Those who run these plans don’t get paid by how much money they make you. They get paid by how much money you turn over to them in the long run. Thus the old line, “Invest for the long-term in a well-diversified portfolio of stocks, bonds, and mutual funds.”
The reality is that real investors do not park their money. They move their money. It is a strategy known as the velocity of money. A true investor’s money is always moving, acquiring new assets, and then moving on to acquire even more assets. Only amateurs park their money.
There are much better ways to invest for your retirement, but they require financial education. I encourage you to start building your financial education and learning about better, more sophisticated ways to prepare for retirement.
Play it smart,
Editor, Rich Dad Poor Dad Daily