Why 401(k) ‘Retirement’ Plans Don’t Work…

… the way they are expected to

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]

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 true in the financial-investment-retirement world, where thousands of advisors tell us how to do things and why, and why things work the way they do and how. Few explain why certain action plans may not work the way you expect. You don’t need to read very far before the fingernail-screeching 401(k) chalkboard becomes deafening. Do they really provide: free money from employers, lower taxable income, or retirement without money worries? Are they the most popular of all retirement plans?

The inadequacies I’m talking about may seem nit-picky at first blush, but the misconceptions and invalid expectations they nurture are mind blowing.  First, your employer is providing a valuable benefit in the form of a self-directed investment program; it is neither a retirement nor a pension plan. Next, 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 than a traditional pension plan.

Cyclical Conundrums

There’s more. Although you pay no taxes on 401(k) contributions now, you will pay through both nostrils when you retire. With bad karma, you may retire when the stock market is not in a party mood and shrinking mutual fund values don’t seem as secure as they did when you bought that cottage in the mountains. More fortunate timing (getting the “gelt” during a rally) doesn’t change the market cycle, and few retirees understand how to create a growing, reasonably close to guaranteed, stream of income. They find themselves in the same cyclical conundrum as their less market-timely brethren.

Note that annuities are not income programs — they are contracts that guarantee return of your money + a low interest guarantee and a confusing array of payment reducing options, after a “you won’t believe the size of it” commission.

The money worries continue into retirement, taxes only ever become larger… yet the misconception that 401(k)s are retirement plans continues. In fact, recent presidents refer to them as pension plans while they constantly tinker with the only true but much too expensive retirement program most of us will ever have… get it?

The 65-year-old retiree can expect four or five major mutual fund/ETF shrinkages during their retirement years — the 401(k) needs a way to make market, interest rate, and economic cycles the participant’s VBF! The differences between retirement programs and savings programs are real, fundamental, and politically incomprehensible to legislators; unless it’s their money… they have a 100% pension plan funded by you.

Retirement programs are income machines

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.

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, index ETFs (they’re next) self-destruct — but you need a plan that can actually grow the income.

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 corporate plans that have survived (plus labor union, government employee, teacher, and congress) continue to produce spendable monthly income checks. 401(k) plans need to be able to produce those monthly income checks. They need to be able to create a natural financial “bridge to retirement income”…. and they can.

The 401(k) deserves its status as a popular (to employer and employee) benefit program. But the ability for participants to focus on retirement income production is not now in the product mix. Instead, totally investment inexperienced as participants generally are, they are required to manage their own portfolios using a menu that contains a hundred thousand product possibilities…

So how do we make the 401(k) plan provide retirement security? That’s really not so difficult. Simply provide managed income creation programs (MCIM “Life Cycle” portfolios, for example) as a wholesale product within the 401(k) structure. These actively-managed-by-professionals plans build spendable income constantly, and are convertible into privately managed individual portfolios at retirement or upon conversion to other rollover programs.

Until that happens, we just have to educate people better about the differences between an as-speculative-as-you-care-to-make-it investment plan and an almost-guaranteed retirement income program.  Market Cycle Investment Management (MCIM) programs have been providing “Life Cycle” retirement income development plans to private individuals since the 1970s. They paid steady income, increasing even, throughout all of the financial crises of our lifetime (with only personal emergency “invasion of principal”).

And, they are now available for inclusion in 401(k) plans….