How many people are relying on their 401k’s as a sole source of income for their retirement? How many people know what they have their 401k invested in? How many people haven’t logged into their accounts for over a year to see what is going on with their 401k? Based on your answers, would you consider yourself an investor?
The truth is, most of us are not investors, yet we are forced to take part in investments in our 401k’s and pray we can retire. I remember a show on PBS Frontline a few years back talking about people not being able to afford to retire. The focus was how companies have moved from pensions where the company takes care of your retirement to the 401k style where we as individuals are responsible. During the interview, an entry level worker came in to drop off some papers. When he left the room, the CFO was asked if he would let the entry level worker choose what the CFO’s 401k was invested in. The CFO looked at the interviewer and asked him if he was crazy of course he wouldn’t. The interviewer then said, “But that’s what you expect him to do for his retirement.”
A 401k was never meant for the masses. The 401k first emerged as an arcane sub-paragraph in the fine print of the tax code in 1978. It was intended as a technical fix to protect the tax shelter for executives at Kodak and Xerox. The 401k provision came about like lots of changes to the tax code comes about which is a company has a particular problem and a particular issue particular to them. They come to Congress and they start asking for their loophole. Other corporations caught on and after more prodding, the IRS ruled in 1981 that savings from regular salary checks also qualified for the 401k tax shelter. This opened the floodgates and created a huge savings for corporations by shifting the reliability and costs to employees. Workers liked it because they felt empowered since they had control.
So what’s it feel like to be in control? Most everyone who had a 401k when the market crashed in October 2008 lost 30, 40, 50% or more in their 401k. For those of us who are younger that didn’t affect us too much. But for the baby boomer getting ready to retire they lost a large portion of what they worked for their whole lives. So what’s to say it won’t happen to the next generation as well? The market is cyclical.
It is to say, when you steal or lose someone’s money, you take a part of their life. The very experts who were trusted to keep the financial markets in order are the very people that robbed anyone vested in the stock markets’ wealth. To add insult to injury, many naïve and innocent people have become agents of these supposed trusted financial experts.
There are tons of financial planners and other so-called experts who truly believe they’re doing the right thing when they recommend the investments they sell. Most of these financial experts are not rich people, just sales people. They sell what they are told to sell. I’ve talked to a few over the last couple years and I always ask their expert opinions on gold and silver or real estate for financial planning purposes. They all say the same thing, to stay away because they are too risky. But losing 50% of your 401k retirement nest egg isn’t? Financial planners don’t like gold, silver or real estate because they can’t make a commission off of you because they can only sell paper assets.
The 401k is basically a government endorsed Ponzi scheme. The primary investment vehicle of a 401k are mutual funds. A mutual fund goes up only if fresh money comes in. A Ponzi scheme requires an ever-increasing flow of money from investors to keep the scheme going. Let me lay it out in a way that is easy to see. Say you have $10,000 to invest. Type in any mutual fund ticker in Google. I’ll pick RSNRX for this example. Now scroll down and find the Key Expenses. This particular fund has a 4.75% front end load commission.
$10,000 * 4.75% = $475 -> commission you pay to the mutual fund company
Heck I could take $10,000 and invest it in the stock market and pay $9 to buy, have the same amount of risk, and pay $9 to sell.
This fund also has an expense ratio of 1.45%.
$10,000 * 1.45% = $145 -> deducted from your earnings each year to cover operating expenses.
Now take the assets of the fund which are $1,600,000,000 (that’s billion) and multiply it by the expense ratio.
$1,600,000,000 * 1.45% = $23,200,000 -> mutual fund company makes every year.
They make this money whether you have a gain or a loss. Who would like to get paid and have your pay be the same if you do a good job or a bad job?
Here’s your return after 1 year assuming a 10% gain in the mutual funds purchase price:
$10,000 - $475 = $9,525
$9,525 * 10% = $953
$9,525 + $953 = $10,478
$10,478 * 1.45% = $152
$10,478 - $152 = $10,326
$10,326 / $10,000 = 3.26% gain
So you made 3.26% when the fund actually had a 10% gain that year. Great investment advice! Plus you the investor fronts 100% of the money and risk. But it’s not you who is getting rich, it’s the mutual fund company. This is what Americans use to plan for retirement. Very risky and very costly if you ask me.
I may be a bit drastic calling a 401k a Ponzi scheme. However in a Ponzi scheme a major problem arises when more people want their money back than are willing to put money in. Maybe that’s a reason why 401k’s have such severe penalties for early withdrawal. If you want to withdraw your money before 59 ½ then you’ll pay a 10% penalty and you’ll get hit with another 40% in tax penalties.
Sorry to paint a dreary picture, I’m not being too positive here. But I believe the hard working class have been mislead. So what do you do then? I have a 401k too. I only put the amount in that my employer matches. Then I take the other money that I could have contributed and will use it for other investments such as real estate where I can get cash flow now and forever. I know real estate and other types of investments aren’t for most people. Unfortunately a 401k is the best thing going for the masses because at least it’s something hopefully. I’m just afraid that it won’t be enough someday. If you would like to find out more about how you can invest your IRA's in real estate please visit my website: http://www.webuyhousescranberry.com/Invest.html
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