The 401K Scam

by: Dave Shafer

[Originally published 7/14/2014]

Most people prefer to play it safe in life. And that makes sense, in the past there were enough real risks to just living to 30, that our brains become hard wired to avoid risk. However, there have always been a small select group that could ignore that. They were the risk takers, the entrepreneurs in modern parlance. From a political perspective, you want to enable the risk takers to do their thing, at the same time allow for the vast majority to live their lives in safety.

Let’s bring these thoughts into the field of investing and retirement income. After WW II we established a nice mix of rewarding entrepreneurship and having a safety net for the majority. But, beginning in the 1980s and accelerating of late, we have gone off into a different direction. Most concerning to this conversation is the death of the pension, and the replacement of pensions with 401ks/IRAs, etc. Why is this concerning? Clearly, when you are forcing people who have no acumen and are hardwired to avoid risk to invest on their own to provide for their old age, that is a recipe for disaster. That would be fine, if the consequences for our society weren’t so devastating. In 1 generation, we will have over 80% of retirees totally dependent upon social security and their own investing acumen.

What we know from the studies is that the average investor in these 401K/IRA schemes are getting almost no return on investment. They are falling behind our inflation rate. We also know that the vast majority of folks aren’t saving enough in real dollars to retire even if they were receiving decent returns on their savings.

So that means in 1 generation our society is going to be dealing with some really poor senior citizens. And that is a problem for our whole society.

Right now we see a stock market going up every year. And we see more and more people putting their savings back into the stock market. This is consistent with how people are hardwired. Fear of not being on the gravy train has trumped fear of the stock market. So they are buying now. When we have our next stock market swoon, they will panic and sell. This is a sure thing. And that will drive down the market even more. And if you are holding stock into this, you better not need to use that value, because if you need it for retirement or emergencies, then you will never be able to make up for those losses. Your retirement will be damaged severely.

Now that you know this, what are you going to do about it? You have two choices, learn to be a very good investor taking advantage of opportunities as they come along, or find a way to passively invest without the risk of huge negative variability. For most folks, that just don’t have the ability to be an investing entrepreneur. They should be putting their savings into vehicles like an EIUL or if in their 50s or 60s an indexed annuity. These vehicles will give you solid overall returns without the risk of huge negative movements. Some of the annuities even guarantee you a 7-8% annual return until you take out guaranteed income for life.

It simply doesn’t make sense for folks who have no experience or acumen in the investment world to try to become an investor as a hobby. It rarely works, yet the vast majority of folks out there don’t understand this basic point [admittedly Wall Street has spent $Billions hiding this basic point]. Don’t fall for this 401K scam. Mutual funds don’t make sense in investing for retirement income. Delaying taxes until your family is out of the home and you have little legitimate tax write offs doesn’t make sense. Believe the research that indicates the poor returns from individuals following the Wall Street advice on investing.