Posts Tagged 401k

The 401(k) Scam – are you an unwitting victim?

I ran across this article today by Dan Solin that echoed my long-time thinking about 401(k) plans: they are designed to help a whole lot of people except the people who own them.

And now that employers are beginning to cut off matching contributions, it’s time to ask yourself if the investment you are making is right for you (include me in that).

The 401(k) system was embraced by employers who wanted to abdicate their responsibility for funding the retirement of their employees. The securities industry saw an opportunity to capture huge assets.

Employers and the securities industry are partners in greed. Here’s how it works:

The brokerage firms and other “advisors” offer “free” administrative services so the employer gets the plan at little cost. All they have to do is make a deal with the devil. The brokerage firms get to select the investment options from which the hapless employees are compelled to make their investment decisions.

You’ll never guess which mutual funds predominate in these plans: high cost funds which are likely to under perform low cost index funds over the long term.

More fees for the brokers. No cost for the employer. Everyone’s a winner.

Except the employee.

As a consequence, most employees make poor investment decisions and end up earning a fraction of what they could have.

Solin goes on to point out the coup de grace: You are encouraged to contribute because of the tax savings you will enjoy right now; i.e., you don’t pay any taxes on the money — YET. When you are old and withdraw your 401K funds, you are taxed at regular tax rates. But if you had invested the same money on your own, you would be taxed at lower long-term capital gains rates. To quote the great philosopher Homer, “Doh!”

It makes me want to cry when I think about all I have gained and lost and gained and lost again in my 401(k)s over the years. I’m pretty much out of time to make up my losses before retirement. But if you’re younger than I, there’s still hope for you.

I’m not advising you to drop out of your 401(k) program. I’m only suggesting that you realize you have other options. And if your employer has stopped matching, it is particularly important to look at those options.

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