The 401(k) Conspiracy: Myths and Misconceptions of the 401(k)
Like many people, you probably entered adulthood believing that a 401(k) retirement plan was a valuable asset – perhaps your only key to a comfortable retirement. But now, the first generation of workers to have 401(k) plans throughout the majority of their careers is just a few years away from retirement. They are in for a big wake up call, because the current retirement system is severely broken – and everything they know about 401(k) plans may be wrong.
One of the most common misconceptions of the 401(k) is that it is tax free. That is not true; it is actually tax deferred, which means you will pay taxes on it when you withdraw from it during retirement. When you make your 401(k) withdrawals, the IRS calculates your tax rate the same way it would if you were being taxed on regular employment income – only now that your children are grown and you have fewer deductions, you may pay even more because you are in a higher tax bracket. What can you do about it? If you don’t want 401(k) taxation to drain you of the retirement income you’ve worked hard for, you may want to consider converting or supplementing your 401(k), via other strategic investments, before it is too late.
It doesn’t end there; there are more misconceptions of the 401(k) that involve the tax code. Many people believe that the tax code will always remain the same for the 401(k) – but what is far more likely to happen is that the government will raise the tax rate on 401(k) withdrawals to pay for its maxed-out Medicare and Social Security programs. So, workers who believe that they will pay the same taxes during retirement as their parents do now are in for an unpleasant surprise during their retirement years – the worst time in life to experience a tax hike.
An Industry Unto Itself – The Complexities of 401(k)
Plus, 401(k) is so complex that it is an industry unto itself – and everyone from the U.S. government, to Washington D.C. lobbyists, to Wall Street hedge fund managers have benefited from it. Who doesn’t stand to benefit from it? The American worker. While they waited for the first generation of 401(k) recipients to approach retirement, these entities have played around with the pool of money that continues to funnel in through 401(k) plans, and used it to pay for any deficits that surfaced in their own budgets. They routinely impose fees and commissions that most 401(k) plan holders don’t even know about, including:
- Legal fees
- Trustee fees
- Transactional fees
- Stewardship fees
- Bookkeeping fees
- Finder’s fees
You have no way of seeing when this money is being taken out of your plan; after all, where would you look? Everyone involved in the 401(k) industry knows that you couldn’t figure it out if you tried. Sadly, the “simple retirement plan” reputation is another of the many misconceptions of the 401(k).
The Heart of the 401(k) Conspiracy
As Chairman of the House Committee on Education and Labor, Congressman George Miller (D-CA) told 60 Minutes, “There clearly has been a raid on these funds by the people of Wall Street. And it’s cost the savers and the future retirees a lot of money that would otherwise be in their account, independent of the financial collapse.” Of course, Rep. Miller still didn’t tell the whole story; he neglected to mention that many of the issues with the 401(k) industry are perpetuated by the U.S. government – and as the demand to put money back into Medicare and Social Security continues to inflate, those issues may only get worse.
Government can use the taxes it receives from 401(k) withdrawals to pay for entitlement programs, and it can modify the tax code to raise the rate retirees pay. When that happens, it will affect every retiree withdrawing from a 401(k), no matter their tax bracket. The 401(k) plan you thought was your safety net will be nothing more than a small fishing net when it comes time to retire. This is the heart of the 401(k) conspiracy.
Finding a Solution in Alternative Strategies
What can you do about it? One way to ward off the impending doom of your 401(k) plan is to roll it over into an alternative investment strategy. One worth considering is the self-created Personal Pension Formulation strategy, which aims to increase your spendable retirement income. It can make a real difference during retirement.
Now that you understand the 401(k) conspiracy, it’s time to stop believing the misconceptions of the 401(k) and start learning about truly valuable retirement strategies.