Why investing in 401K sucks and why you should pull out???

[Lane Kawaoka]

Looking to round out an argument for loved ones. Please give me some feedback???

Back when our moms and dads were starting with their career, their investments are centered on having a secured future – have their own house, a good savings plan, etc. These are all to ensure they can just relax, travel the world, and enjoy their grandchildren when they grow old. For today’s professionals, however, investing is more than just securing their future. 

The young millennial professionals are all about working and investing to have a bright future – even before their hair turns gray. It’s all about having a passive source of income they can spend to travel the world, invest in another business, and even save for the future. However, despite the modern approach some professionals are doing with saving and investing, there are still some who are concerned with retirement funds.

In the corporate world, investing for the future becomes more appealing with the 401(k) plan. This is a retirement plan in America that is provided by employers to their employees so they can save up for the future.

Since its inception in 1978, the 401(k) plan has become a popular employer sponsored retirement plan. Employers are able to use it as a means of distributing company stocks to employees while employees are able to save up for their retirement years.

At present, this plan has evolved and now has several variations such as SIMPLE 401(k). And while investing on a 401(k) sounds promising, it is, however, a not advisable way to save at all.

A 401(k) plan is an arrangement where an employee can choose to take the compensation in cash or defer a percentage of it to his 401(k) account. The amount is not taxable, however, it becomes one when it is withdrawn.

Over the past years, the 401(k) plan has evolved and has become a dominant retirement plan for US workers. While its structure continues to improve, there are still problems that need to be addressed.

Think of the 401(k) plan as a house you want to live in…

Yes, we have heard how we should invest on plans to secure our retirement years, but will it be enough for us when we get there?

If 401(k) is a house, you may have gotten a place you can live in for the rest of your life. However, just like with any private property, there are extra fees included.

Plumbing

Renovating

Electrical wiring

Remodeling

Expanding

Repainting

And the list goes on…

You may have gotten yourself a good deal but, as the years progress, you may wonder if you really were able to save enough money for your future since you had more expenses after buying the house.

Here’s the brutal fact about relying on a 401(k) plan – just like the house, you are paying more fees than you plan on saving.

In 2012, the US Department of Labor mandates every 401(k) providers to provide a detailed disclosure of the fees they were extracted from their client’s hard-earned savings. After 30 years since its inception, it was finally the truth of how much money they were getting was finally out.

Despite the issue coming into light, the information wasn’t enough to warn investors about the plan. Four years since the government mandated the disclosure of all extracted fees, many employees is still stuck with the idea their employers are there to take care of them. This made them continue to invest on a 401(k) fund.

In 2015, the Obama administration gave further information regarding the 401(k) plan. They revealed that yearly, the 401 (k) plan gains a total of $17 billion from its hidden charges and backdoor payments.

Other than these payments, there were also excessive fees included in the plan. The sum of the hidden charges, the backdoor payments, and the fees which are already known to clients, were reported to easily eat all the account holder’s investment than what they planned to save.

Commisions

The 401 (k) plan may be good, but it is not an efficient one. Other than the excessive fees and hidden charges, then it also has the huge commission with very expensive ratios. These layers pile-up the fees that some are often hidden in between.

These fees do matter. After all, these are hard-earned money, which investors plan to use when they retire.

Since we talked about buying a house, let’s see what other similarities can we get from this idea on how you can save up for your future.

Buying a house is similar to investing in a 401(k) plan.

Retirement funds are believed to be the ultimate source of our security when we grow old. It is a saving for the future which allows us to sit back and relax. The same goes for owning your own house. You get to have a place you call home for the rest of your life…. But here’s the catch, it has extra fees.

Here’s what you get to pay when you own a home:

1.Mortgage

2.Insurance fees

These fees are known to you. After all, you can’t buy the home you want if you haven’t loaned the mortgage right? You also need to pay the insurance. These are fees you can compute and budget easily monthly. However, there are other areas in owning a home, you need spend for.

What is its similarity with investing in a 401(k) plan?

As stated earlier, the contribution is where the company also gets its investments. This is where hidden charges come in or the expenses you can’t budget easily since it can’t be forecasted. In owning a home, they represent the following.

1.Repairs

From time to time you need to repair your house. if you want to live comfortably you need to repaint it, check the cracks on the walls and ceiling, fix the plumbing and even the wiring.

2.Remodelling

A lot of employees continue to say yes to 401(k) offers especially when it is laid out to them. But just before saying yes to it, reviewing the offer is advisable. Here are ways how to disclose all fees.

Disclosing the known fees

Remember that every year the government mandates every 401(k) plans to be disclosed. The disclosed areas are the annual fees which the holder is already aware of. These are contained in the notices which consists of two parts:

a. An explanation of the plan and individual level fees which shows what will be deducted from the plan holder’s account.

b. A comparative chart which lists down each plan investment.

From the disclosed information, you can determine how much from your account will be deducted by the company and other payables you are making.

Indirect fees are not included in the annual disclosure of 401(k) plans, but it is still possible to see them although it is not easy. Here are ways how to uncover the hidden fees.

1. Secure a copy of the fund’s prospectus. A prospectus if a legal document that the Securities and Exchange Commissions requires from all plan providers to file. It provides you with the details about the investment offering.

2. Review the expense ratio from the prospectus and the comparative chart. From these documents, determine the correct share class for your fund. Take note that mutual fund companies offer multiple share classes.

3. From the same documents, determine how much is attributed to the wrap fee. A wrap fee is included in the comparative chart if the provider is an insurance company.

4. After reviewing the documents, look for the 12b-1fees. This is a revenue sharing type and is found in the prospectus. Depending whether it is applicable, the report may include a breakdown of its expense ratio.

5. From the fee data you’ve collected, add them up and deduct it from the 401(k) investment offer.