The plights and perils of 401(k) retirement plans
The two types of retirement plans are Defined Benefits (pensions) whereas the plan comes with preset benefits and contributions are made by the employers and the Defined Contributions 401(k) whereas the plan is defined by the contributions that are split between the employer and the employee. We will focus on the Defined Contribution plan for this discussion.
The 401(k) is classified by the IRS as a tax qualified plan where the taxes are deferred until the funds are withdrawn either by termination of employment or taken out for retirement. If the plan has less than $5,000.00 then the plan will be a force out whereas the employee must take the distributions subject to early 10% penalty withdrawal if taken before reaching age 59 ½ and pay the taxes that were deferred.
The funds in the plan is tied directly to the stock market through Mutual Funds which are primarily chosen by the Fund Manager and can be good performing stocks along with bad under performing stocks (dogs) and are set to balance each other out. The problem is that most employees are novice investors and are not aware of how their portfolios are performing year end and year out and therefore run into the “I’m afraid to look at my statements” syndrome. Lets’ take a look at the Wikipedia explanation of the 401(k) origin.
“The section of the Internal Revenue Code that made 401(k) plans possible was enacted into law in 1978. It was intended to allow taxpayers a break on taxes on deferred income. In 1980, a benefits consultant named Ted Benna took note of the previously obscure provision and figured out that it could be used to create a simple, tax-advantaged way to save for retirement. The client he was working for at the time chose not to create a 401(k) plan.
Unlike defined benefit ERISA plans or banking institution savings accounts, there is no government insurance for assets held in 401(k) accounts. Plans of sponsors experiencing financial difficulties sometimes have funding problems. Fortunately, the bankruptcy laws give a high priority to sponsor funding liability. In moving between jobs, this should be a consideration by a plan participant in whether to leave assets in the old plan or roll over the assets to a new employer plan.”
When the 401(k) was first introduced to the public it was touted as the investment of the future. Accolades abound about how these miraculous products will turn the employee into a millionaire by the time one reaches retirement age. Little did one know that without the government protections afforded by the Defined Benefits Plan without anyone knowing that their money was at the disposal of Wall Street Hawkers. So over the years the Defined Contributions were slaves to the volatility of the ups and downs of the stock markets. When the company Enron raided their employees’ 401(k) money and lost every cent the crooks in charge went to prison but the employees were left with nothing to show for their dedicated savings. Then came the Great Recession of 2008 and again the hard working employees were left with losses not of their own doing and became victims of the “I’m afraid to look at my statements syndrome.” But the market corrected in 2010 and the 401(k) revived and the employees started feeling confident in their retirement plans and suddenly all was good.
Now, comes’ the real hard truth about the stock market that was performing so well when the Dow Jones Industrial Average (DOW) went from 6900 in 2009 to record breaking numbers 16,000 towards the end of 2013 and all was good, right? But as always with the stock market comes the inevitable correction and the employees as of today February 21, 2014 are back to the “I’m afraid to look at my statements syndrome.” This was never supposed to be the results when this product was first touted about how the employee would retire a millionaire but in reality this product is a failure.
What are your options?
Your options, or your goals for your money is, consistent growth. The IRS rules allow the employee to take control of their own retirement money and put it to use for a more favorable product. If you are still in a plan from your current employer then you must review the rules of your plan to see if you can discontinue your plan, possibly pay a fine and roll it over to a more consistent growth plan such as a Traditional Individual Retirement Account (IRA), a ROTH IRA or an annuity. The better option would be a Self-Directed IRA (SDIRA). With the SDIRA you can be able to invest in a small business, a franchise, real estate, real estate notes and many other programs. You can do this without having to pay the early 10% withdrawal or the deferred taxes. It’s your money and you and not Wall Street should make the financial decision about your retirement future. Most of the options mentioned above have averaged an return of 10% growth which is more consistent than the “I’m afraid to look at my statements syndrome.”
For more information on growing your money towards retirement send an inquiry to firstname.lastname@example.org.
Put in the subject line “Syndrome.”