401k’s Should Not Be Required, Sorry MSN

“It’s time to make the 401k mandatory, with every employer offering a plan and both employer and employee required to contribute.” This little ditty comes from www.msn.com, and although I know their intentions are good, this is an idea that has been perpetuated for quite some time, and it’s time to take a deeper look into 401k’s and their supposed benefits.

Savings rates are extremely low in America. And with all the taxes and interest we pay as a country, most Americans aren’t saving enough to actually retire when they become of age.

But has the 401k actually helped solve these problems.

The answer is no.

And making mandatory contributions may not help either.

The problem with 401k’s is that they aren’t putting most Americans in a better position, in fact, many Americans come out in worse positions than they expected.

Bloomberg ran an investigative report on television called “The Truth Behind 401k Fees” where they show how many hidden fees are sitting behind your 401k, and these fees can add up to a huge chunk of your money.

That is one of the many problems with a 401k. Although your money grows tax deferred, you are actually being forced to use a system that has been created to make other people rich, those people are investment banks and account managers. They could be taking anywhere between 1.5-4 percent of your money every year. And with all the interest that you could accumulate on these dollars, the opportunity cost can be extremely high.

Of course they want you to make 401k’s mandatory, it just puts money in their own pocket.

Now, personally I wouldn’t want to make ANY type of savings vehicle mandatory, I feel like people should take personal responsibility. However, if we were even going to think about making savings mandatory, the 401k would be one of worst places for Americans to put their money.

Bloomberg continues with Gerald Schneider, and his story. They go into hidden fees and talk about how much Gerry is getting hit with hidden fees. But they only brush over the fact that from Jan 2008-March 2008 he lost 44,100 dollars in his 401k from market losses. That’s 10 percent. He lost 10 percent of his money in 3 months.

That is huge. And this shows another problem with 401k’s. They are tied to the market.

Many Americans don’t see a difference between savings and investments. But there is a difference, a huge difference.

Investment dollars are dollars that you put at risk, this means that you could lose every dollar you have invested.

Savings dollars are dollars that you can’t afford to lose. When it comes to retirement, you can’t afford to come up short.

401k’s are tied to the markets. Therefore they can lose money. Why are Americans putting their savings dollars in investment portfolios?

Quite frankly the answer is tradition. It’s traditional thinking that puts many people in terrible retirement situations. When it comes to retirement you want certainty.

You need to be absolutely certain that when you retire you will have X amount of dollars. Unfortunately, when you put your money in a 401k plan, you are gambling with your money, and hoping that the market goes up. All you can really do is pray.

And if you planned to retire in the last 11 years you probably were on the wrong side of the 401k coin.

These are just a few of the problems with 401k retirement plans. 401k’s should not be mandatory nor should they be looked at as a retirement vehicle for any Americans. They are too risk to be considered retirement vehicles. If you are using them for investment dollars then that is great, but if you are banking on getting rich off your 401k then you might want to think again.

Any plan where market returns are necessary to achieve your goal is a prayer, not a plan.

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Josh

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