The “Ugly” Truth about the 401(k)

The article below about 401(k) Plans is by Tony Walker, a Registered Investment Advisor and author of a clever little book, Don’t Follow the Herd.  Tony’s “cow” book can be purchased at www.tonywalkerfinancial.com.  I recommend Tony’s book to every retirement-minded American because I simply believe its truths will help you have a better retirement.  Please know that I am not paid for this recommendation nor do I share in any proceeds from the book.  The 401(k) article is a gem and I encourage you to read it, comment if you desire and pass it along to others.                                                                                                     Shelby J. Smith, Ph.D.

The “Ugly” Truth about the 401(k)

My granddad retired in 1978. He and his faithful wife, Hazel, dedicated 43 years of their lives to one employer – the phone company. In return for his years of service to them, the phone company rewarded Granddad with the following:

1. A lifetime pension check – Granddad called it “mailbox money”;
2. Company-provided health insurance for the rest of their lives;
3. Free phone and long-distance service – you laugh, but remember, this was before unlimited cell and texting!

While all three kept Granddad and Hazel WorryFree – it was the “mailbox money” that really kept them out of the Poor House. Because with that guaranteed check each month, all they had to do was “budget” their monthly expenses around the phone company’s predictable monthly check. It was truly a “WorryFree Retirement.”

Apparently, what was good for Granddad wasn’t good enough for my generation – the Baby Boomers. Our question: where in the h-e-double-hockey-sticks did all those “guaranteed” pension incomes go? How come WE don’t get “mailbox money”?

Because of the 401(k) plan – that’s why!

While employers during Granddad’s generation could afford pension plans (more specifically, they were called defined benefit plans) these guaranteed plans also cost the employers a ton of money. That’s because money that would have otherwise gone to profits, research and development, and stockholders had to be “booked” and stuffed away under the corporate mattress to fulfill the promise of future mailbox money to all of their retirees. In addition, back when pension plans were created, employers never dreamed employees would stick around long past normal retirement age (age 65) to collect all of this money.

Forced to “ease” out of these expensive plans, some wise guy (around the year of 1980) came up with the idea of the 401(k) plan.  The thought: we’ll turn all the controls over to the employees by allowing them to team up with Wally World (Wall Street) while the employer would “match” the employees’ contributions. It all sounded really cool.

©2010, TONY WALKER, ALL RIGHTS RESERVED
SOURCES:  Private Pension Plan Bulletin Historical Tables and Graphs.  US Department of Labor,  Employee Benefits Security Administration.  February 2009. 
2009 Investment Company Fact Book 49th Edition.  By the Investment Company Institute.  Copyright 2009.

Basically, the mutual fund industry – thanks to the introduction of the 401(k) plan – went from millions to trillions!

Bottom line: Joe Lunchbox got duped!

Instead of relying on his employer to take care of his retirement, he followed the financial herd and instead made Wall Street rich. Good for them, maybe not so good for him. No wonder folks are so worried today.

So now what are we supposed to do now?

As a Registered Investment Advisor, each day I sit across the table from consumers who are dazed, confused and lost as to what to do with their 401(k) money. Here’s what I advise them:

1. Stop treating your 401(k) as the mother of all retirement plans; contribute to it only “up to” the match. If you don’t get a match, I strongly encourage you to see an outside retirement specialist to decide if you should contribute any new money to the plan. There are plenty of better ideas for your money.
2. Forget the notion that there is some magic to the term “pre-tax.” Rather, think of your 401(k) contribution as “postponing the tax,” because one day, you’ll have to pay-the-piper. Uncle Sam will want his money; it’s called taxes and you still owe them. In fact, the longer you have the plan, the worse it usually gets!
3. Check with your employer to see if you can roll over any monies within the plan. You’ll have to get a copy of the Plan Document to see if there is money that can be rolled out into your own self-directed IRA. In many cases, even if you’re still working with the employer, you can roll out previous 401(k) contributions rolled into this plan, the employer contribution, and in some cases the after-tax portion. Best of all, if you’re 59 ½ or older, some documents let you roll out your “pre-tax” contributions as well. You might even want to spend some of it!
4. If you’ve recently quit, been fired, retired…whatever – get your money out of the 401(k) and into a self-directed IRA so you can get some different options and planning opportunities. One word of caution: if you’re not yet 59 ½, there are some cases where leaving some or all of the money in the 401(k) might make sense since money coming out of the plan is not subject to the 10% tax penalty.

Be Worryfree!

Tony Walker

Tony Walker is a retirement planning expert and author of three books, including WorryFree Retirement.  For the past three years, Tony has been the featured guest each Monday morning on NBC affiliate, Wave3 TV in Louisville Kentucky, answering retirement questions from a live audience that includes over 600,000 households.  www.tonywalkerfinancial.com