Why 401(k) Retirement Plans Really Don't Work

The good news about the Internet is the information we can get our cursors on
instantly; the bad news is the information we can get our heads around
instantly, but without any way of gauging accuracy, relevance, or completeness.
This is particularly evident in the financial-investment-retirement world, where
thousands of websites tell us how to do things and why, and why things work the
way they do and how. Few gurus explain why and how certain concepts and plans of
action just may not work the way they are supposed to.

You don't need to read very far before the fingernail-screeching 401(k)
chalkboard becomes deafening. For example, do they provide: 1) free money from
employers, 2) lower taxable income, 3) retirement without any worries about
money, or are they, 4) one of the most popular retirement plans.

The inadequacies I'm talking about may seem nit-picky at first blush, but the
misconceptions and invalid expectations they nurture in inexperienced investors
are mind blowing. Employers are providing a valuable benefit in the form of a
defined contribution savings plan, a self-directed investment program that has
little in common with defined benefit retirement and pension plans. It's not
free money at all. It's a clever, goal-directed, business expense that is both
touchy-feely visible to you and far less expensive for your boss. It's a good
deal, but not a retirement plan.

Although it is true that you do not pay taxes on your contributions during your
earning years, you will undoubtedly pay through both nostrils when you retire.
If your karma is off, you may find yourself trying to retire at a time when the
stock market is not in a party mood and your shrinking mutual funds just don't
seem as secure as you thought they were a few months earlier. Typically, the
65-year-old retiree can expect four or five major mutual fund shrinkages during
retirement.

Similarly, more fortunate retirees (those who get the "gelt" during a rally)
generally fail to lock in a guaranteed stream of income, and find themselves in
the same cyclical conundrum as their less market-timely brethren. The money
worries continue well after retirement; the taxes become much larger than anyone
ever anticipates; the misconception that the 401(k) is a retirement plan
continues. In fact, a recent president once proposed to change the only true
retirement program that most of us belong to into a similar non-retirement
program.

No, this isn't just semantics. The differences between retirement programs and
savings programs are very real, extremely fundamental, and politically
incomprehensible to legislators--- so long as it's not their money.

Retirement programs are income machines designed to support people, not to make
them feel wealthy, investment savvy, or temporarily tax-free. Pension plans
produce fixed amounts of monthly income that don't change appreciably when
dot-coms, real estate, CDOs, or index funds (they're next) self-destruct. You
just can't buy dinner or medications with currency futures, gold bars, or
appreciated acreage.

The investments contained in a pension plan are designed to produce income, and
are managed by trustees who are experienced in constructing safe, conservative,
diversified programs that are just as boring as they can possibly be. Most
pension plan benefits are calculated as a percentage of the amount earned while
employed. The Social Security retirement/welfare plan is a tontinesque Ponzi
scheme based on the government's ability to continually abuse taxpayers. There
are no investments at all, and no trustees... just IOUs.

Defined benefit pension programs are rapidly becoming extinct--- corporate
America can no longer afford them, along with 50% of total Social Security
contributions, employee health care, and CEOs who collect $50 million per year
from their unwary shareholders. But those that have survived (notably, labor
union plans, retirement annuity contracts, and the Congressional Pension System)
produce monthly income checks without any problems whatsoever. And here we
thought our congressional leaders were incompetent--- not when it comes to their
own benefit package + COLAs.

Still, the 401(k) plan deserves to be every bit as popular as it has become. It,
and the vast array of complicated IRAs, could help save Social Security, improve
the economy, and create jobs--- all those good things that neither of the
presidential candidates have a chance of achieving. Just two simple strokes of
an Oval Office ballpoint get it done: 1) Eliminate all taxes of any kind, at any
jurisdictional level, on any form of investment and/or retirement income. 2)
Replace the failing Social Security system with a private pension system, funded
by taxpayers only and managed by the existing insurance industry infrastructure.

How do we make the 401(k) plan provide more retirement security? That's not so
difficult either. Simply dictate that all plans require participants to invest
at least 60% of their assets in individual (plain vanilla) income securities
that can be withdrawn "in kind" at retirement.

Until that happens, we just have to educate people better and make the
appropriate distinctions between an as-speculative-as-you-care-to-make-it
savings and investment plan and a pretty-much-guaranteed retirement or pension
plan. Existing 401(k) participants should contribute enough to get the matching
contribution, and start a personal tax-free income account with whatever
disposable income is left.

Now about that Congressional Pension Plan--- we've only our apathetic selves to
blame.


Steve Selengut
http://www.sancoservices.com
http://www.kiawahgolfinvestmentseminars.com/
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street
Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"



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