by Joshwa Fuchs
Last Updated: Nov 24th, 2021
It's time we discuss why 401k's are a bad idea however, we must first start with the history. 401ks are a old technology or retirement strategy that was created back in 1978 by accident almost. Congress passed the Revenue Act of 1978, including a provision Section 401(k) that gave employees a tax free way to defer compensation from bonuses or stock options. The law went into effect on Jan 1st 1980.
Ted Benna, a benefits consultant at the Johnson Companies seen the new law as an opportunity for employers to create a tax advantaged savings account for their employees. He stated "I knew it was going to be big, but I was certainly not anticipating that it would be the primary way people would be accumulating and saving money for retirement 40 years later.
1981: The IRS issued rules that allowed employees to contribute to this "Savings" account aka 401k plan through salary deductions, which jump started the widespread roll-out of 401(k) plans int he early 1980's.
1983: Nearly half of all large firms offered, or considered offering a 401(k) plan. Companies like the option because it was cheaper and more predictible to fund than pensions. Employees were attracted to a new savings vehicle that, they were told, could put them in a better position to retire.
Two bull-market runs in the 1980's and 1990's pushed 401(k) accounts higher. Then two recessions in the 2000's erased those gains and prompted second thoughts from some early 401(k) champions.
1990: 401(k) plans had more than $384 Billion in assets with 19 million active participants.
1996: Assets in 401(k) plans exceeded $1 Trillion dollars with more than 30 million active particpants.
2001: The Economic Growth and tax Relief Reconciliation Action resulted in several changes to the 401(k). In general, the law increased the amount that individuals and companies could contribute to the accounts. Additionally, it allowed participants over the age of 50 to make "catch up" contributions. In 2017, the contribution limit is $18,000 and the max catch up contribution is $6,000.
2006: The Pension Protection Act made it easier for companies to enroll their employees automatically into 401(k) plans. Some companies even automatically increased their employee's contributions by 1% a year to encourage savings.
2007/2008: The major mortgage market melt down caused a major market crash which resulted in 401(k) holders to lose half or more of their 401k. Many took more than 7 years to gain what they lost. Tha tis 7 years of lost growth while still contributing to it without and gains. That hurt people big time especially those in retirement or close to it.
Today: 401(k) plans hold more than $4.8 Trillion dollars in assets. And pensions, in the private sector are increasingly rare. The great lie is that 401(k)'s were capable of replacing the old system of pensions, "former American Society of Pension Actuaries head Gerald Facciani tells The Journal. "It was Oversold."
There is no dobut more and more amercians are putting their hard earned dollars into 401(k)s but is that the smart thing to do? Well lets find out.
A 401(k) is a employer sponsored retirement account. It allows a employee to dedicate a percentage of their PRE TAX dollars or income into a retirement savings account. These funds are typically invested into a range of vehicles such as Stocks, Bonds, Mutual Funds and various cash. Oh and as described above, the name came directly from the tax code. Super creative right?
Now you may have heard of an EMPLOYER MATCH, where the employer may match up to a specific percentage of the employees own contribution up to a set limit. Lots of your typical advisors will tell you to put in until the match max has been hit. They will also say to do it because of the tax benefits. However the withdrawl at retirement hits you with massive taxes. So hold that thought as we dive further.
Now they state that there is 401(k) protection from creditors. That is true due to the Employee Retirement Income Security Act of 1974 (ERISA) from claims by judgement creditors. Lets talk maximum CAP on your 401(k). The wonderful IRS allows for aa cap of $19,500 but your employer may cap the amount BELOW that to redue their match. For individuals over 50 years of age they can contribute another $6,500 a year.
Lets talk liquidity and access to your hard earned dollars. If you want to pull funds out for buying a house (they wont penalize you if you're a first time home buyer) however they dont advertise that to you so most home buyers already bougth a house. Lets say you want to start a business, well you pull that out you get hit with a 10% penalty, plus all that you pulled out is taxed as ORDINARY INCOME. Well there goes some of your hard earned dollars.
Now please note this is my bias opinion after working with businesses and seeing how 401k's are structured and where the money goes along with the accumulated growth (or lack thereof) occurs. So take this as you see fit.
Lets dive into the many reasons here.
1. You cant be liquid and obtain your funds whenever you want.
2. You are stuck with stocks, bonds and mutual funds which are dying as the dollar tanks.
3. You are not able to deploy funds into high yielding investments like cryptocurrency or real estate or even gold or precious metals.
4. You're not able to invest some of it into long term stable growth and highly protected Cash Value Whole Life Insurance policies.
5. You are paying hefty annual fees of 1-4% or more to folks on wall street managing the portfolio they sold to your employer in which you have no say where the funds go. This could be hundreds of thousands of dollars they are taking away from you.
6. When you withdrawl your funds during retirement, you will be taxed as ordinary income making it subject to both state and federal taxes at time of retirement.
7. Today is the highest federal tax rate is only 37% but that has floated as high as 94% (1944). There were also 3 different decades (1950's, 1960's and the 1970's) where the federal tax rate never dipped below 70%. Are you kidding me 70%.
8. Lets not even forget about inflation which is out of the world at the moment as the folks in the whitehouse continue to print money wrecklessly, you wont be able to withstand the 2%-4% annual inflation rate which could be far higher after 2021's "Covid19 stimulus funding parade".
9. Lets not forget how 2007 most people LOST 50% of their 401k overnight. Do you want to risk that without any cash flow or additional benefits?
10. Lets not forget about the employer match. Did you realize that most employers who dont have to match a 401(k) who sets limits by the way and most likely gets a legal kickback from the fund manager would pay you several dollars higher per hour or per salary? Yes this is very true, nothing is for free folks this is how they get ya.
11. Federal goverment pulling back on bond buying. This along with the massive deflation in the US dollar has pushed massive investors to start hedging and investing into bigger things like cryptocurrencies that are over $1TRILLION in market cap and growing strong. This has a massive impact on the precious stocks, bonds and mutual funds which will cause them to implode again. The goverment can only print so much money and keep the bubble alive.
I guess the main question is do you want to lose 50% or even up to 100% of your life savings or do you want to pull it out and put it into things that bring you a much much higher rate of return than a whopping 7.5% if you are lucky? If so then I highly encourage you to click the button below and get a complimentary assessment with us.
Now dont take my word for it. You can also listen to financial experts like Grant Cardone or James Altucher, who share my same exact perspective in regards to 401(k)'s being a big scam. Grant Cardone said "The 401(k) is merely where you kiss your money away for 40 years in hopes of it growing."
James Altucher stated that "401(k)'s are complete scams. This is another trillion dollar industry that has a lot of money at stake if people stop believing in the mythology bolted to the scam. There is even revenue-sharing employers and 401(k) plan managers.. Is this legal... You bet it is.
I could go on and on about why the 401(k) is horrible, but as many know most people dont have a huge attention span. With that I recommend you watch the video or if you are a speed reader then slam this down. The only advice I have for you is if you have a 401k yes even with your employer, stop contributing, stop having them contribute (their money isnt doing anything in that account and I am happy to show you why, but you should sit down speak with one of our Wealth Advocates and get a plan to roll over your 401k or cash it out depending on the best strategies.
Schedule a complementary call with us to go over your requirements and get a free project roadmapp done. If a business take us up on a comlimentary Tax Plan assessment to see how much we can save you!
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