Opinion

6 Reasons Why 401(k) Plans Are a Rip-Off

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Posted: Mar 05, 2019 12:01 AM
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6 Reasons Why 401(k) Plans Are a Rip-Off

Source: (AP Photo/Elise Amendola, File)

This financial column is sponsored by Birch Gold

It’s practically accepted as gospel that 401(k) plans are a good way to save and invest for retirement. But, believe it or not, 401(k)’s are not always as good a deal as they’ve been made out to be. In fact, once you see all the facts laid out, you may even think they’re a rip-off!

Why might you decide against investing in a company-sponsored 401(k)? Here are six reasons.

Reason #1: You Could Be Taxed at a Higher Rate

Deferring taxes until you retire sounds like a good idea at first. You avoid paying taxes today so that you can invest more than you would be able to otherwise.

But later on, tax rates may have changed. So when you retire, there is a possibility taxes will be higher than they are today.

Furthermore, Required Minimum Distributions (RMDs) could ultimately push you into a higher tax bracket than you want to be in.

Reason #2: You Have Limited Control Over Your Money

Once you put your money in a 401(k), you can’t pull it out without a penalty until you’re 59.5 years old.

If you need the money for some reason before that age, or if you’d like to use it for a downpayment on a house, it will still be off-limits to you.

There are only two ways to access your 401(k) money:

  1. Change jobs and take an early withdrawal (with tax penalty) instead of rolling over the account to your new employer.

  1. Take out a loan against your 401(k) and then start making monthly payments with interest to pay back the money you borrowed.

Clearly, neither option is appealing or advantageous.

Reason #3: Your Employer’s Match Money Isn’t Exactly Free

Many employers offer a match for employees who participate in the company 401(k). If your employer offers a 100% match, they’ll put in $1 every time you put in $1.

Free money, right?

That’s what everybody thinks. But it’s actually not free money at all.

A study conducted by the Center for Retirement Research found that for every dollar a company contributes to the 401(k) through matching, they pay 99 cents less.

In other words, companies fund their employer matching program by reducing salaries by an equivalent amount.

Reason #4: You May Never Be Fully Vested

Reduced wages aren’t the only problem with the 401(k) employer match. There’s also the problem of vesting.

In most companies, your employer match funds won’t be fully vested until you’ve been in your job for six years, the maximum vesting schedule allowed by law.

If you get laid off or you switch jobs prior to the six-year mark, you’ll forfeit a portion of the employer matching funds that you thought were yours.

This may not seem like a problem until you realize that the average length of employment at any job is only 4.2 years, according to the Bureau of Labor Statistics.

If you’re contributing to your 401(k) because of your employer match, then you may want to reconsider.

Reason #5: You Are Probably Paying Higher Fees than You Think

Most people who put money into 401(k) accounts never read the fine print to see how much they’re paying in fees. And this is a mistake, because the fees are often higher than you think.

According to Brightscope, small plans charge an average of 1.9% per year in fees, while larger plans charge an average of 1.08% per year.

That might not seem like a lot, but it adds up over the course of 30-40 years. Just how much does it add up? According to the Department of Labor: Fees of only 1% per year can slash the value of your savings by 28% over the next 35 years.

In this case, ignorance may be bliss, but it’s also extremely expensive!

Reason #6: Your Expectations of Growth May Be Unrealistic

Does the stock market always go up? The mainstream financial media would like you to believe that. And the market has trended up more often than not.

But there have been some very big recessions during which the stock market lost significant value, the most recent being the Great Recession of 2008/2009.

If you’re relatively young and a decade or two from retirement, then a recession may not affect you. But it’s a whole different story if you’re over 65. You may be forced to take distributions while stock prices are low, causing you to lose money — something you can’t afford to do in retirement.

Once you’re beyond age 60, you don’t have much, if any time, to recover from a significant stock market decline. And you have absolutely no control over the timing of that. It’s a long-term gamble that you have to hope works out in your favor.

Still Want a Tax-Advantaged Investment Vehicle? Consider an IRA

If you want to avoid the 401(k) but still want a tax-advantaged investment vehicle, consider an IRA.

IRAs offer thousands of additional investments that you won’t be able to get through your employer-sponsored 401(k), including a wide array of alternative assets, such as gold, silver, real estate, tax lien certificates and more.

And in many cases the fees will be lower as well. According to David Fuhrman, CFA, CFP®, “401(k) plans typically have higher administrative and reporting costs than IRA accounts.”

What Other Investment Rip-offs and Scams Are Out There?

Even though 401(k)s are considered “above board” investment vehicles, they are a still a rip-off for hundreds of thousands of people. Believe it or not, this is also true of many widely accepted investment opportunities, and it’s why you should closely examine any potential investment you’re thinking of making.

But it’s not just the rip-offs you need to watch out for, it’s also the blatant investment scams, which often appear to be legitimate at first glance. If you don’t know what to look for, you could become a victim and lose tens of thousands of dollars.

With that in mind, Birch Gold Group has put together a free Scam Protection Guide, which includes six warning signs of a scam as well as six ways to protect yourself. Watch this video for a preview:

To educate yourself with the full contents of the guide, click here to read the Scam Protection Guide from Birch Gold Group.