M.C Laubscher – 22 Reasons Why the Retirement System is Broken
Today I am going to give you my honest opinion about a financial sacred cow, qualified retirement plans (401K, 403b, 457b and I.R.A’s). I have a very contrarian view that will be very different from what you have heard from your financial advisor, financial media, employer, family and friends.
My goal is not to persuade you or have you agree with me. My objective is firstly to give you my honest opinion and secondly to get you to see a completely different perspective that will hopefully be the catalyst for you to do your own research, due diligence and fact checking to form your own independent opinion.
I encourage you to think for yourself and not just swallow opinions and advice from others in any area of your life. Question everything. As Josh Billings once said, “As a general rule if you want to get the truth, hear both sides and believe neither”.
I always wondered that why, if only a small minority of people truly build real lasting wealth, then why do we follow the financial advice that the majority of people follow, that never do build real lasting wealth?
If you were told something that wasn’t true, wouldn’t you want to know about it?
The majority of people actually do the exact opposite of what they need to do financially in order to build lasting wealth and achieve financial security.
Trillion dollar industries, including the finance industry, housing industry and college industry, spend millions of dollars in marketing and advertisement, so you really have to question information that these industries provide.
Investing and “saving” in a well-diversified portfolio of mutual funds inside of qualified retirement plans (401k, 403b and I.R.A’s) is the worst financial advice that you can follow.
Not only is it the riskiest financial strategy, but it also exposes your money and wealth to the biggest wealth destroyers of inflation, taxes and fees. Even still, this is the advice that most people follow.
There’s approximately $24.7 trillion in retirement assets in the United States that account for 36% of all household financial assets. Remember Willie Sutton’s law, as a bank robber, he robbed banks since that was where all the money was kept.
Here’s 22 reasons why I think the current retirement system is broken:
1. The system is unproven. The Baby Boomer generation will be the first to test this system by using the 401k, 403b and IRAs to retire. These retirement vehicles have never been used for retirement; there is no proven track record, yet many people believe in these methods and gamble with their financial security and future.
2. There’s easy-entry, but no exit strategy. This system is very easy to get into and very hard to get out of; that alone should be a red flag. There are early withdrawal penalties, unfair borrowing rules, tax implications, and misleading incentives to keep your money in these plans for as long as possible.The Pension Protection Act of 2006 states that employees, upon joining a company, are automatically enrolled into 401k plans by default, and at a default savings contribution rate with automatic increases of their contributions over time. These contributions are allocated to the company’s chosen default investment. Employees have to opt out of enrollment and can change the contribution rate, but they have to take action in order to do so. Employers can also override investment selections if they believe poor investment decisions are ongoing, and direct investments to the default mutual funds that the employer thinks is a better fit.This law also gives the employer protection from liability when they implement automatic enrollment into 401k plans. It’s impossible to sue your employer if you lose your money in funds that they forced you into in 2008. Why would the government do this?
3. You don’t own your retirement plan. If you look at the fine print, your 401k plan doesn’t technically belong to you. Within the fine print, you’ll find the acronym “FBO” (For Benefit Of), which means that your retirement plan is technically owned by the government according to the tax law, but is provided for your benefit.Remember: the government can change the law during or after the next crisis. Two months into the crisis in 2008, the U.S House of Representatives discussed confiscating 401ks, I.R.As. If you have a brokerage account, you also don’t own your stocks or mutual funds within that account. There are three basic ways to hold stocks: street name registration, direct registration, or physical certificate. Street name registration is default unless you make special arrangements. Cede 7 Co., a subsidiary of the Depository Trust Company (DTC), probably owns your stocks, and you aren’t the registered owner. The DTC holds the shares for your broker and your broker holds the shares for you. The companies that you are the “beneficial owner” of have no record of you.
4. You have no control over your qualified retirement plan and the mutual funds in them. There are contribution restrictions and withdrawal restrictions on when and how you can withdraw money without penalties and fees at age 59 and a half. Afterwards, you are FORCED to withdraw a required minimum distribution at age 70 and a half. What if the market is horrible and at record lows when you’re forced to take withdrawals?Qualified retirement plans have limited investment options available to participants. The variety and mutual funds offered in plans can be determined by the following questions: 1) Do you have any control over the performance of the mutual funds and your plan? and 2) Can you influence performance of the stock market and these mutual funds?
5. It offers no immediate cash flow. In some mutual funds and stocks, the companies pay you dividends, but you have no access to the cash flow to put it to more productive use. The most important part of an investment for professional investors is cash flow. The limited access within these plans gives participants little to no opportunity for cash flow accumulation. Investing for capital gains is hoping and praying that the markets will go up, which isn’t a sound plan.
6. The employer match myth. Do you really think that companies all over the United States will just give free money to employees? There is no such thing as Santa Claus, the Easter bunny, the tooth fairy, or free money.The Center for Retirement Research did a study based on tax data and showed that, for every dollar an employer contributes to a 401k match, they paid an average of 99 cents less in salary. Companies that don’t offer employer-match salaries pay higher salaries.Think about it: it’s your money. If you don’t have a qualified retirement plan that they need to pay a match to, you can negotiate for a better salary or compensation. Employers also receive tax incentives to offer these qualified retirement plans, and save money in the long run.Employers don’t give you your match all at once, but spread it out over a span of 4–6 years. If you leave before the six years, you don’t get the full match, and according to the Bureau of Labor Statistic, the average time an employee stays with their employer is 4.6 years.There are also opportunities for revenue sharing between employers and retirement plan managers. This is 100% legal, and a good way for employers to make back some of the money they contribute towards your match.
7. It only works when the stock market goes up. Markets do three things: they go up, down and sideways. Retirement plans only have a chance to succeed when it goes up.
8. There is no downside protection, so you can be wiped out overnight.Did your financial planner or retirement plan administrator use a stop loss to protect your portfolio and retirement in 2001 and 2008? Like CBS News once asked, “What plan allows millions of people to lose 30–50% of their savings?”
9. There are no guarantees. “Past performance is no guarantee of future results.”This statement is openly admitted in every fancy marketing piece of a mutual fund. Stock markets are volatile and unpredictable, with no guarantees or certainty. If you don’t know how much you could possibly have in savings, investments and retirement plans in 5, 10, 15, 20 or even 30 years, you don’t have a plan, and are instead gambling with your financial security and future.
10. You are forced to time the markets. Financial planners advise their clients to stay in the markets long-term and ride out the wild market roller coaster in a diversified portfolio; they also say not to time the market, because nobody can, but that’s exactly what you’re doing, isn’t it?If you’re planning on retiring at a certain age with a qualified retirement plan, you’re betting and hoping that the market will be healthy enough at the time to have enough money to retire on.Isn’t that timing the market? What if the market crashes before you need the money? You’re hoping the money will be there when you need to take it out.How about target date mutual funds? If 86% of mutual fund managers cannot beat the market average S & P 500 index, how are they going to ensure that your money will be there when you need it? This is why many managers of target date mutual fund managers don’t invest in the funds they managed.By having your retirement money in an unpredictable, volatile vehicle, you are forced to time the market when you want to retire.
11. Enormous continuous fees and commissions by retirement plan administrators and mutual fund companies can eat away half your gains.Have you looked at your qualified retirement statement? Have you read the fine print on fees?There are many undisclosed fees, including: legal fees, trustee fees, transaction fees, stewardship fees, bookkeeping fees, finder fees and more. Many mutual funds even charge you a marketing fee. That’s right: a 12B-1 Fee. They charge you to market their products in order to lure more people into these vehicles.In addition to commissions and trading fees, mutual funds inside retirement plans often take a 1–2% fee right off the top, regardless if your plan grows or not. This doesn’t sound like much, but the “magic of compound returns” your financial planner talks about also applies to fees, and they compound, as well eat up, about two thirds of your gain on average.
“What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compound costs.” — Jack Bogle, the founder of Vanguard
Bogle used an example in which a person invested $1,000.00 when they were 20 years old, which grew at an annual rate of 8%, with a management fee of 2.5% per year. The assumption was that the person passed away at 85. Over 65 years, the fees ate up a 79% of what the investor would have earned without any fees. Garret Gunderson in a recent article gave a more relatable example: “If you contribute $5,000 per year, from 25 years old to 65, and the fund goes up 7 percent every year, your money would turn into around $1,143,000. Yet, you’d only get to keep $669,400, or less than 60 percent. That’s because 7 percent compounding returns hundreds of thousands more than a 5 percent compounding return, and none of it goes to you. The 2 percent fee cuts the return exponentially. In the example above, by the time you turn 75 the mutual fund may have taken two-thirds of your gains.
”Do you really want to invest in a system where you put up 100 percent of the capital, you take 100 percent of the risk, and you get 30 percent of the return?” — Jack Bogle, the founder of Vanguard
12. It’s a horrible tax strategy. Taxes differ in qualified retirement plans until you eventually take out the money, during which you are force to withdraw your money by required minimum distribution legislation.I see a couple of problems with this. You have your biggest tax write-offs and deductions (e.g. dependents, home mortgage interest) in your younger working years that you won’t have once you start taking money out of your retirement plans. You will undeniably be taxed at the highest rate without the deductions once you start to withdraw money. Taxes are relatively low in present day if you look at the tax history of the United States.The U.S government has over $18 trillion in debt, and this number will only continue to increase every year into the future; they’ve already shown their inability to balance the budget and be fiscally responsible. We have an aging population and underfunded Social Security, Medicare, Medicaid, government programs and entitlements; someone will have to pay for this.The U.S government is projecting an increase of revenue in the future. Where do you think this money will come from?If you’re planning to be in a lower tax bracket when you retire, you’re either planning to be poor or not looking at the current trends. We need to put ourselves in a position where we can control our tax liability in the future. I would rather pay taxes on the seed than on the harvest.Whether you know it or not, you also pay taxes within your retirement plan mutual funds. Fund managers buy and sell stocks in your retirement plan. There’s a tax liability, and if you read the fine print, you’re the one paying for this.The only way you can make a mutual fund worse from a tax-planning standpoint is by putting it into a qualified retirement plan. A regular mutual fund, when bought outside, is taxed as portfolio income and is subject to capital gains tax (15- 20%, please check with your tax advisor). When you buy a fund inside a qualified retirement plan, it’s taxed as earned income when you withdraw it from the plan (25–30%, please check with your tax advisor). Tax-wise, this is the worst thing you can do with a mutual fund.
13. More taxes: estate taxes. The unborn and the deceased are prime tax targets for politicians since they can’t vote. Qualified retirement plans, especially 401ks, are easy targets for estate taxes. When the proceeds are passed on to the next generation, they’re subject to estate tax and income tax. (Consult your tax advisor for more information.)
14. Your opportunity cost is huge. You’re giving up the opportunity to use YOUR money to capitalize on other, more profitable, opportunities for the next 30+ years, and you’re not getting any security, guarantees, certainty or predictability for it. Who would ever take that deal?
15. Lack of liquidity and easy access to savings. You cannot easily access funds in your qualified retirement plan when you need it for emergencies. This is different for each plan, but most plan administrators only allow you to access your money for certain things, such as buying a house or hardships. You also can’t access your money from these plans without selling your mutual funds in them.When you do take out a loan against your retirement plan and lose your job with your current employer, you have, in most cases, 60 days to pay back the loan or you will be charged penalties (10%) and taxes on the loan amount.When you borrow against a retirement plan, it also reduces the “magic of compounding growth” since your balance draws down in your account.
16. The investment returns are horrible. There is a big difference between real, average and actual returns. 86% of mutual fund managers failed to beat the market average S&P 500 in 2014. A very small percentage of Hedge Fund managers beat the market yearly. If the professionals struggle to beat the market average, what do you think your financial planner’s chances are to pick the funds that will beat the market average?Research firm DALBAR, Inc. reported that the average investor in asset allocation mutual funds (which diversifies your money in equities and fixed-income funds) earned only 1.85% annually over the last 30 years, while official inflation averaged 2.8% (CPI).Investors in equity funds got a 3.69% return over the last 30 years, which is almost two-thirds less than the return of the S&P 500 index over the same time. Safe, fixed-income funds returned 0.72% annually, also not keeping up with inflation.There is a very big difference between average return and real actual returns. The average return, or performance, of mutual funds in their prospectuses isn’t the ‘real return’ of the fund.
17. Neglect of stewardship, responsibility and independence. Nobody cares, or will care, about your money as much as you do. Why would you release all responsibility and accountability and give your money to other people? Why would you want to be dependent on a financial advisor, institution and the stock market for your financial security? Why would you ever give up power over your own financial life and destiny?I have never met a man that made his millions investing in qualified retirement plan mutual funds; however, I can name a couple of people that have made their billions selling and managing them.
18. Wall Street now gets paid with the US government before you do.Robert Castiglione wrote in his book Leap: Lifetime Economic Acceleration Process that financial institutions want your money, and they want it on a regular systematic basis, preferably through automatic withdrawal. Once they have your money, they want to hold on to it for as long as possible, since they get paid a percentage whether your account grows or not, and when they eventually give it back to you, they want to give back as little as possible. By passing the current Tax Payment Act in 1943 to help pay for the war, the U.S Government ensured that they were paid before employees, through money being deducted directly out of your paycheck. The Employee Retirement Income Security Act was passed in 1974, and the part that established the 401k was amended in 1978. In 1981, several months after Tedd Benna designed his first 401(k) plan for his employer, the IRS issued proposed regulations on Section 401k that officially sanctioned pre-tax salary reductions. Qualified retirement plans were introduced to employees, as well as pay-deducting contributions directly from paychecks. Wall Street and Uncle Sam were then paid before the employee ever saw a cent of it.
19. The stock market is a Ponzi scheme. A Ponzi, or pyramid, scheme is a scam in which people are persuaded to invest through promises of unusually high returns, with early investors paid their returns out of money put in by later investors. Investors that get out early during bull markets usually profit handsomely, while the herd of investors that enter the market late lose badly. If you’re investing in a qualified retirement plan, your contributions are automatically allocated to certain mutual funds. People in these vehicles are usually the ones losing the most money in market corrections and crashes, while professional investors not in them can move more unrestricted and flexibly out of the market with their profits intact. With required minimum distributions at age 70 and a half in retirement plans, people are forced to sell their mutual funds and withdraw money out of their plans. They need new money flowing into the market when the need to sell their mutual funds. If there is no new buyers and only a large number of sellers, the market collapses like it potentially could with 78 million baby boomers taking required minimum distributions over the next 18 years.
20. It’s institutionalized theft. The current financial structure enables a steady flow of money into the pool of $24 trillion in retirement accounts: twice a month, actually, from retirement plan participants. Because mutual funds and retirement plan coordinators are paid a percentage of the assets under management (AUM), regardless of if they provide a decent return for their investors, isn’t this just another form of institutionalized theft? What are you paying for, and why are you sometimes paying double dip fees and commissions?Think about it: they really don’t have to do much to skim money from the pool of $24 trillion. Whether investors in retirement accounts and mutual funds make money or lose money, Wall Street gets paid.Wall Street is a main contributor to both political parties, as spending millions of dollars in lobbying is one of the biggest investments for media advertisement. Wall Street has infiltrated regulatory agencies, and no leader seems to have the courage to put them in line. There is a revolving door between Wall Street, regulatory agencies, and government. If you have read the news over the last 15 years, you would have witnessed one banking scandal after another, whether it was LIBOR, High Frequency Trading, Drug Money Laundering,precious metals price fixing or Forex. These are corrupt, immoral and fraudulent institutions. Do you feel comfortable trusting these characters with your money for 30 years?Your money is picked at daily like a carcass by vultures, through shenanigans like late trading, market time, insider trading, front running, high frequency trading, and inflating stock prices. We have seen government tricks like Rule 48 and the plunge protection team (PPT)coming in and manipulating markets daily.
21. If you have a traditional qualified retirement plan, you’re planning to be poor. Financial advisors tell their clients that they’ll be in a lower tax bracket when they retire. If you are indeed going to be in a lower one, you will be poor. SO, by design, this retirement plan will treat you as a poor, old person.
22. It encourages unconscious investing. You don’t invest in anything you don’t know about or understand. What do you know about your plan and the mutual funds in your plan? What stocks are in those mutual funds? What is going on in those companies and their boards and executives? You could be invested in a company that is using slave labor, or a business that’s not aligned with your religious and moral values. If you can’t answer how these companies are solving problems, adding value, or providing a service to people, you’re trying to get something for nothing, and that’s GAMBLING. The whole system is so complicated, even the father of the modern 401k admitted to this and claimed it failed Americans.
Fortunately, there are plenty of options and resources available for anyone to opt out of this predatory system, and create and build real, lasting wealth and lifetime financial security.
Yours in purpose and prosperity,