Whoa there! Now where did this animosity come from about investing?
I assure you, I want everyone on the Earth to invest in the future, but one thing I don’t want to see is people putting their hard-earned money into an employer-sponsored retirement account that is just going to be a massive money suck for over 40 years. You always have a choice about investing for the future, and I’m here to tell you that a 401(k) IS A BAD CHOICE.
About 76% of all workers in the public and private sectors have some sort of employee-sponsored 401(k) or retirement savings account. The goal is to help their employees save for retirement by taking out a piece of their gross income and setting it aside to be managed by a third party for the benefit of their employees as a way to supplement Social Security.
Companies often tout retirement plans on their employment pages as “another great reason to work here.”
But is it really a good enough reason?
While I believe the intention is good, the end result is not good for the employee. Here are a few articles from the Huffington Post and Forbes to further my point. However, these are the three basic reasons why 401(k)s are a scam and are all the more reason why you should learn to invest for retirement for yourself – and GradMoney can help get you there!
1. You Never Know Where Your Money Is Being Invested
I spoke at length about this in my recent TED Talk: your investments should be a direct reflection of YOUR VALUES if you are looking to change the future for the better. With an employer-sponsored 401(k) you will not get this kind of freedom.
Imagine that you are a vegetarian/vegan and you contribute a hefty portion of your paycheck to a 401(k) over 40 years. Your employer hands over this money to an investment advisor which in turn puts your money into mutual funds. Nearly all mutual funds are heavily vested in the components of the Dow Jones Industrial Average, and one of the biggest Dow Components is McDonald’s (MCD). So over the course of your career, you are individually contributing thousands of dollars in the investment of McDonald’s stock. You may avoid eating a cheeseburger in public, but your retirement account says otherwise.
The point is, you can never know exactly where and how your money is being invested at any given time in an employer-sponsored retirement account. If you forgo contributing and instead set aside money in your own IRA, then you can control precisely where, and who, is profiting from your money.
2. Fees, Fees, FEES!
I used to think it was okay to participate in an employer’s 401(k) plan if it meant that they would match your contributions. In fact, this is how I was able to save so much money in my 4 years with AIG. However, in the long run that “free money” provided by the employer is really just a way to offset some of the management fees that will accrue over time and
the taxes that you will ultimately have to pay when you withdraw the money at retirement. It would make you sick to know just how much money is wasted on fees and taxes in a 401(k) over the course of your retirement. In fact, a research report from Demos shows that 401(k) nest eggs end up nearly 30% LOWER over a lifetime of savings thanks to fees alone.
More research from Demos has shown that the fees charged by 401(k)’s and mutual funds are extremely excessive; far beyond any realistic prices used to actually mange the funds. Ultimately, financial firms have a bottom-line interest and will push the management fees as high as the market can possibly bear, which is in direct conflict with the need of the investor (i.e. YOU). These investment advisors do not have a legal, fiduciary responsibility to protect your money or your best interests, and while recent government regulations after Dodd-Frank have tried to get the SEC to impose these responsibilities, they still have yet to do it.
3. In Addition To Fees, You Get To Pay MORE Taxes
Everyone’s goal for the future should be to be in a higher tax bracket than where they originally started out their careers – not because it means you want to pay more taxes, it just means you’re making more money. Since all 401(k) contributions are pre-tax, this means that the money won’t be taxed as income until you make withdrawals after retirement.
What does that mean?
Instead of taxing the income at 20% today and putting the money directly into a Roth IRA – which is retirement money that has already been taxed and cannot be taxed again when you withdraw – you will instead pay a ton of management fees only to withdraw the money at age 65 and pay 38% in taxes instead! See the problem here?
Now you may be wondering, what is the alternative? Well the alternative is GREAT in my humble opinion. I recently rolled over all of my 401(k)s into an IRA that I can directly manage and the results have been awesome.
Keep following GradMoney’s posts and I will explain the next steps for taking over your life!
Greetings, GradMoney Readers!
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