What your 401(k) advisor likely won’t tell you

The book makes some excellent points about 401(k)’s that are worth noting:

1. 401(k)’s were designed to supplement employer pension plans. When employers realized they could save buckets of money by offering only 401(k) plans, pension plans went by the wayside.
    
2. Not surprisingly, a whole new industry of “401(k) plan advisors” cropped up because advisors could make a bucket of money for putting these plans “under management.” These plans are structured to benefit the institutions and advisors who administer them and the government.  Not you.
    
3. The investment options are usually painfully limited, and the advisor available to you is around maybe once or twice year.  In some plans, you can change your investment allocation only once a year.
    
4. 401(k)’s lack liquidity.  If you access the money before you are 59-and-a-half years old, you pay a 10% penalty.  Sure, you can pull it out for medical emergencies, education or to buy a house.  But most people need it when they are unemployed or in some other financial crisis, which isn’t exempt from the 10% penalty.
    
5. Some employers won’t let you shut down your 401(k) unless you quit your job.
    
6. 401(k) investments are often limited to stock market investment choices and most people don’t have the expertise or the time to research the choices.  The stock market volatility can be a killer, and most people are fully exposed.
    
7. Employers can modify, suspend, or eliminate the company match anytime they want.
    
8. If you borrow against your 401(k) and your employment is terminated for any reason, you usually owe the money back in 90 days.  Or pay the taxes and penalty.
    
9. Administrative fees can easily exceed 3%. If you only take 2% off the top, it can cut your long-term return in half.  If hypothetically, if the administrator invests its 3% from your $8K contribution to your 401(k), in 40 years, the administrator would have more money.  Whose retirement are you funding?
    
10. You’re sold on this story:  Save money in your 401(k) now to get a tax benefit, and then when you retire, you’ll take money out in a lower tax bracket.  The story’s unlikely to be true.  First, I believe tax rates are going up.  But even if they don’t, you’ve likely lost all the deductions you had while contributing to the 401(k) like the deduction for mortgage interest, your dependents, and your 401(k) or IRA contribution.  Those have likely disappeared by the time you retire.
     
11. The government is ALWAYS your 401(k) partner. The bigger your account gets, the bigger the government’s share.  Whose retirement are you planning?
     
12. If you die owning a 401(k), your heirs could get as little as 27% of it after taxes.

  There is a better way.  Let’s talk.
 

Finding the right retirement income sources

What about the government?  Will Social Security income go away?  Hard to say.  Social Security income is a huge political football that no one wants to drop or be accused of ending.  As workers (a large electorate), we pay into the system and would like to see money out of the system.  Yet, the Social Security statement itself discloses that it predicts to pay on 78% of benefits in 2037 (http://www.ssa.gov/mystatement/currentstatement.pdf).  Even my clients in their late 50s don’t think they’ll get a dime of Social Security.  Here’s my take:  If it’s there, I want my clients to get their share and have that share be taxed as little as possible.  That takes some planning now.

What about employers?  Will employer pensions ever come back into vogue?  Unlikely.  They’re expensive and complicated to manage.  Employers faced with rising costs (medical insurance being high on that list) are looking to give retirement income benefits as cheaply as possible.  In years past that has meant the 401k, which for most highly compensated employees and business owners is inadequate.  The 401k was never intended to be the sole retirement benefit. It was designed to supplement the pension offered.  Even if my clients fund a 401k, we have to find alternate investment vehicles.

What about personal savings?  No one feels they’re saving enough.  That might be true.  Only to make it worse, no one feels like they made any money with their investments in the last 10 years.  There are many solutions here besides winning the lottery (and, by the way, if this is your solution, remember that you have to play to win – it’s always about the follow-through).  One of the tricks, I believe, is to find retirement income sources that provide tax-free income.  No, not the Roth IRA which most Bay Area families don’t quality to fund, and even if they did, they’d only be able to put away $5K.  Business owners (especially of C corporations), in particular, have potentially one of the best strategies to make this happen.  The other trick is to find non-stock market related investments.

The government might create a universal retirement funding plan.  You might win the lottery.  Or, you might just explore some of your personal savings options.