Why 401(k) Retirement Plans Really Dont Work

The good news about the Internet is the information we can get our cursors on instantly; the bad news is the information we can get our heads around instantly, but without any way of gauging accuracy, relevance, or completeness. This is particularly evident in the financial-investment-retirement world, where thousands of websites tell us how to do things and why, and why things work the way they do and how.

Few gurus explain why and how certain concepts and plans of action just may not work the way they are supposed to. You dont need to read very far before the fingernail-screeching 401(k) chalkboard becomes deafening.

For example, do they provide: 1) free money from employers, 2) lower taxable income, 3) retirement without any worries about money, or are they, 4) one of the most popular retirement plans.

The inadequacies Im talking about may seem nit-picky at first blush, but the misconceptions and invalid expectations they nurture in inexperienced investors are mind blowing.

Employers are providing a valuable benefit in the form of a defined contribution savings plan, a self-directed investment program that has little in common with defined benefit retirement and pension plans. Its not free money at all. Its a clever, goal-directed, business expense that is both touchy-feely visible to you and far less expensive for your boss. Its a good deal, but not a retirement plan.

Although it is true that you do not pay taxes on your contributions during your earning years, you will undoubtedly pay through both nostrils when you retire. If your karma is off, you may find yourself trying to retire at a time when the stock market is not in a party mood and your shrinking mutual funds just dont seem as secure as you thought they were a few months earlier. Typically, the 65-year-old retiree can expect four or five major mutual fund shrinkages during retirement.

Similarly, more fortunate retirees (those who get the gelt during a rally) generally fail to lock in a guaranteed stream of income, and find themselves in the same cyclical conundrum as their less market-timely brethren. The money worries continue well after retirement; the taxes become much larger than anyone ever anticipates; the misconception that the 401(k) is a retirement plan continues. In fact, a recent president once proposed to change the only true retirement program that most of us belong to into a similar non-retirement program.

No, this isnt just semantics. The differences between retirement programs and savings programs are very real, extremely fundamental, and politically incomprehensible to legislators--- so long as its not their money.

Retirement programs are income machines designed to support people, not to make them feel wealthy, investment savvy, or temporarily tax-free. Pension plans produce fixed amounts of monthly income that dont change appreciably when dot-coms, real estate, CDOs, or index funds (theyre next) self-destruct. You just cant buy dinner or medications with currency futures, gold bars, or appreciated acreage.

The investments contained in a pension plan are designed to produce income, and are managed by trustees who are experienced in constructing safe, conservative, diversified programs that are just as boring as they can possibly be. Most pension plan benefits are calculated as a percentage of the amount earned while employed.

The Social Security retirement/welfare plan is a tontinesque Ponzi scheme based on the governments ability to continually abuse taxpayers. There are no investments at all, and no trustees... just IOUs.

Defined benefit pension programs are rapidly becoming extinct--- corporate America can no longer afford them, along with 50% of total Social Security contributions, employee health care, and CEOs who collect $50 million per year from their unwary shareholders. But those that have survived (notably, labor union plans, retirement annuity contracts, and the Congressional Pension System) produce monthly income checks without any problems whatsoever.

And here we thought our congressional leaders were incompetent--- not when it comes to their own benefit package COLAs.

Still, the 401(k) plan deserves to be every bit as popular as it has become. It, and the vast array of complicated IRAs, could help save Social Security, improve the economy, and create jobs--- all those good things that neither of the presidential candidates have a chance of achieving. Just two simple strokes of an Oval Office ballpoint get it done: 1) Eliminate all taxes of any kind, at any jurisdictional level, on any form of investment and/or retirement income. 2) Replace the failing Social Security system with a private pension system, funded by taxpayers only and managed by the existing insurance industry infrastructure.

How do we make the 401(k) plan provide more retirement security? Thats not so difficult either. Simply dictate that all plans require participants to invest at least 60% of their assets in individual (plain vanilla) income securities that can be withdrawn in kind at retirement.

Until that happens, we just have to educate people better and make the appropriate distinctions between an as-speculative-as-you-care-to-make-it savings and investment plan and a pretty-much-guaranteed retirement or pension plan. Existing 401(k) participants should contribute enough to get the matching contribution, and start a personal tax-free income account with whatever disposable income is left.

Now about that Congressional Pension Plan--- weve only our apathetic selves to blame.

The good news about the Net is the information we can get our cursors on instantly; the bad news is the information we can get our heads round instantly, but without any way of gauging accuracy, relevance, or completeness. This is particularly evident in the financial-investment-retirement world, where thousands of websites tell us how to do things and why, and why things work the way they do and how.

Few gurus explain why and how certain concepts and plans of action just may not work the way they are supposed to. You dont need to read very far before the fingernail-screeching 401(k) blackboard becomes deafening.

For example, do they provide: 1) free money from employers, 2) lower taxable income, 3) retirement without any worries about money, or are they, 4) one of the most popular retreat plans.

The inadequacies Im talking about may seem nit-picky at first blush, but the misconceptions and incapacitate expectations they upbringing in inexperienced investors are mind blowing.

Employers are providing a of value do good in the form of a defined contribution savings plan, a self-directed investment program that has footling in common with formed benefit retirement and pension plans. Its not free money at all. Its a clever, goal-directed, business expense that is both touchy-feely visible to you and far less expensive for your boss. Its a good deal, but not a retirement plan.

Although it is true that you do not pay taxes on your contributions during your earning years, you will undoubtedly pay through both nostrils when you retire. If your karma is off, you may find yourself nerve-racking to fall back at a time when the stock grocery is not in a party mood and your shrinking common funds just dont seem as dependable as you idea they were a few months earlier. Typically, the 65-year-old retiree can expect four or five major mutual fund shrinkages during retirement.

Similarly, more fortunate retirees (those who get the gelt during a rally) generally fail to lock in a guaranteed watercourse of income, and find themselves in the same cyclical conundrum as their less market-timely brethren. The money worries stay well after retirement; the taxes become much bigger than anyone ever anticipates; the misconception that the 401(k) is a retirement plan continues. In fact, a recent president once proposed to change the only true retreat political platform that most of us belong to into a similar non-retirement program.

No, this isnt just semantics. The differences betwixt retirement programs and savings programs are very real, exceedingly fundamental, and politically incomprehensible to legislators--- so long as its not their money.

Retirement programs are income machines intentional to sustenance people, not to make them feel wealthy, investing savvy, or temporarily tax-free. Pension plans produce fixed amounts of monthly income that dont transfer appreciably when dot-coms, real estate, CDOs, or index funds (theyre next) self-destruct. You just cant buy dinner party or medications with currency futures, gold bars, or appreciated acreage.

The investments contained in a pension plan are designed to produce income, and are managed by trustees who are experienced in constructing safe, conservative, diversified programs that are just as boring as they can possibly be. Most pension off plan benefits are deliberate as a percentage of the amount earned while employed.

The Social certificate retirement/welfare plan is a tontinesque Ponzi scheme based on the governments power to continually abuse taxpayers. There are no investments at all, and no trustees... just IOUs.

Defined benefit pension programs are rapidly decorous extinct--- bodied America can no longest afford them, along with 50% of total herding(a) Security contributions, employee health care, and CEOs who collect $50 million per year from their unwary shareholders. But those that have survived (notably, labor union plans, retreat annuity contracts, and the Congressional Pension System) bring on monthly income checks without any problems whatsoever.

And here we intellection our congressional leadership were incompetent--- not when it comes to their own benefit package COLAs.

Still, the 401(k) plan deserves to be every bit as popular as it has become. It, and the vast array of complicated IRAs, could help save Social Security, improve the economy, and create jobs--- all those good things that neither of the presidential candidates have a chance of achieving. Just two simple-minded strokes of an Oval Office ballpoint get it done: 1) Eliminate all taxes of any kind, at any jurisdictional level, on any form of investiture and/or retreat income. 2) put back the weakness Social Security system with a private pension system, funded by taxpayers only and managed by the existing insurance diligence infrastructure.

How do we make the 401(k) plan provide more retreat security? Thats not so difficult either. Simply prescribe that all plans require participants to invest at least 60% of their assets in individual (plain vanilla) income securities that can be withdrawn in kind at retirement.

Until that happens, we just have to prepare people better and make the capture distinctions between an as-speculative-as-you-care-to-make-it savings and investment plan and a pretty-much-guaranteed retreat or pension plan. Existing 401(k) participants should bestow enough to get the matching contribution, and start a personal tax-free income account with whatever disposable income is left.

Now about that congressional Pension Plan--- weve only our apathetic selves to blame.

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