We all need some new 401k options!
In my last blog “Compassionate Capitalism” I highlighted how employers are increasingly being held accountable for the success or failure of their employee’s 401k retirement results. If the employee losses 30% in a stock market downturn, lawmakers are struggling who to blame and it seems they have chosen “The Employer”…?? We need some new options…But what could fix this?
I recently read yet another article lamenting the fact that 401k Plans are failing American Workers (For millions, 401(k) plans have fallen short). Add this to an article I read back in 2013 (Father of modern 401K says it fails many Americans) and this article from 2010 (America’s Failed 401k Experiment). So…Why is it a “Failure” and why does Wall Street and the IRS keep telling us to provide them to our employees?
Let’s examine “Why” they fail. The best explanation is from “Ted Benna” in the 2013 article above… “Unfortunately, the worst thing that happened … is too many had the highest stock ownership that they ever had at the wrong time“. In other words, it’s not the 401k that has failed… it’s the high percentage of stock ownership during a market downturn that created the failures. Ah yes… the “Lost Decade” from 2000-2010 where millions of IRA/401k saving Americans will never live long enough to recoup the losses suffered there.
Well this seems easy to fix, and in our book “Future Proof Investing” we show you how to remedy this in the first 4 chapters. In our book we reference the “Pre 1980’s” and “Pre IRA/401k”, “Sound Financial Plan” that recommends a MAXIMUM 20% of your life savings exposed to stock market risks. Leaving 80% growing yet protected from Stock Market down turns. This seems logical and easy to do, but that leads us to… “Why does Wall Street and the IRS keep telling us to ignore this advice in our 401k plans and expose 100% of our money to market risks?” The answer is easy … “Follow the Money” and there is BIG money in 401k plans! Could you imagine if Americans only had 20% of their 401k in the Stock Market? While it would be great for individual American workers because it would protect their IRA/401k plans from the obvious cause of failure (Market Downturns), it would be considered bad for Wall Street brokers and the IRS… yes the IRS too.
I am not trying to be an anarchist or an alarmist. I am stating that the relationship between the 401k, the IRS and Wall Street is entangled through coincidence, history and evolution more than a conspiracy.
First, let’s look at the history. The 401k IRS code was released in 1978. It was only 1.5 pages long and a young financial advisor named Ted Benna thought this would be a great way for Americans to “Supplement” their employer sponsored “Pension Plans”. The IRS agreed because the popular “Supplemental” plan at that time was “Deferred Compensation Plans” and the IRS disliked the tax shelter characteristics of these plans while the 401k plans made the taxation process cut and dry… No conspiracy here, just coincidental goals at this point. Then, employers struggled to maintain pension plan solvency, so they slowly eliminated pensions and replaced them with 401k plans. Again, the IRS just wants easier taxation, so they encouraged this as well. Again, no conspiracy, just coincidental evolution… But this is where the “troubling” developments begin.
During the 80’s and 90’s, the baby boomer generation was encouraged to put massive amounts of their earnings into these “401k retirement Plans”. The government stock market regulatory agency (the Security and Exchange Commission (SEC)) has jurisdictions in all 50 states and was the IRS’s logical “first” choice to help regulate these plans, and this is where the troubling developments begin. The SEC actually allowed Wall Street brokers to entice employees to “Participate and invest” by telling stories of “Compound Interest Growth”, even though compound interest is impossible in the stock market. Maybe you remember the same story; “if your money grows at 9% per year for 30 years (a “compound interest” example) then you will have millions of dollars for retirement”. Unfortunately the SEC also encouraged 401k plans to be invested 100% in the Stock Market rendering these examples of compound interest growth impossible and borderline criminal. It also sets employees up for failure during “Market Downturns”.
The “401k path to retirement” track record has been a dismal failure and the troubling development that never ceases to amaze me is how they still refer to them as a “Savings Plan”. Let’s get something straight… a savings plan that is exposed to stock market risks is NOT a good plan and that is the main reason 401ks are failing so many Americans today! Exposure to Market risks makes it a “Risk Based Investment” with uncontrolled losses… It is NOT a Savings Plan and employers should not be held responsible for that!
I believe it is well past time to begin offering “Non Stock Market” investment alternatives such as Fixed Indexed Annuities (FIA) into 401k plans so employees can experience gains without uncontrolled losses. Below is a hypothetical FIA versus the S&P 500 performance during the “Lost Decade”.
Not only do the employees benefit but employers are able to reduce fees in their 401k costs. There… I said it and I do not care how much the SEC or Wall Street want to stop me. In fact, I will continue to evangelize this to every employer and employee I can get to listen. Every day, more and more are using this alternative option in their plans today, and the word is beginning to spread! We can fix the 401k experiment and it’s never too late, make an effort to fix your 401ks and IRAs with Non-Stock market alternatives! Are you confident enough in your current plan to get a 2nd opinion?