For most us, our lives are, for lack of a better analogy, painted into a corner. While we may not feel good about our need for a car we still drive, the way our mortgage might be structured or even the promise we made to ourselves to finance our children’s college education. But we have made these commitments or choices and want to follow through the best we can. And this unfortunate situation extends to our retirement plans and our effort to get our working selves to that point.
Is it necessarily wrong to accept with the hand we have been dealt, a possible comparison that plays directly into what financial advisor, entrepreneur, and coach to financial professionals Garrett B. Gunderson’s asserted recently suggesting that “401(k)s and similar qualified plans is not investing at all–it is one of the riskiest gambles for most individuals”?
He thinks that the whole scheme is basically a marketing strategy which sweeps us up and that we are mostly unaware of the motives these folks (plan sponsors, our employers, Wall Street, etc.) have. The inability for the average participant in these types of plans to grasp the true nature of the plan that, he claims is simply a one-sided profit game where we have little knowledge of what we are getting into and fewer opportunities that we should have is at the heart of what he claims is our retirement option. And lastly, using the buzzword that gets the ear of folks who think that control changes everything, Mr. Gunderson takes these plans to task, listing fifteen reasons why this type of plan is too risky.
Briefly, he believes that “Qualified retirement plans, such as 401(k)s and IRAs, do not provide immediate cash flow”. And rightly so. For the vast majority of us, the concept of evenly contributing to a plan such as this, in a pre-tax environment allows more than the stagnation of cash flow “letting the money sit allows it to compound”, it provides investment discipline.
He further posits that this method essentially leaves your money “tied up with penalties attached for early withdrawal”. Why? Because, otherwise we would withdraw it at each bump in the road we experience. The recent downturn offered us evidence of this as folks were willing to tap these funds for loans, redirect contributions to income or simply ante up the penalties and withdraw the money to cover short-term losses.
Mr. Gunderson then attacks the use of the stock market (“that most individuals do not have the knowledge nor the ability to understand or mitigate”), the free money of the employer match that he calls a myth (he doesn’t suggest exactly why, when an employer physically puts money into your account that this is somehow a bad thing), and that you are doing all of this investing without so much as the basic knowledge of how, once this money is invested, it accomplishes what you intend it to do.
Granted, there are far too many plan participants who are not as well versed as they should be. If there were, default investing efforts would not be needed for those who are either underinvested or not invested at all. But nothing comes without costs and your 401(k) will charge you for the service. How much is the right amount is debatable but those fees will always be there.
These plans were set-up based on a line in the tax code. That said, he attacks the tax incentives that are offered with these plans, the potential that these plans are “sitting ducks” for estate taxes and the most glaring assumption about plan participants is that they do not know how to get out of these plans.
Most of our problems with these plans, aside from the government’s efforts to get us more involved in what is truly our best opportunity, he worries about withdrawals and “the most destructive aspect of 401(k)s is that they cause many individuals to abdicate their responsibility, abandon self-reliance, and neglect their stewardship over their own prosperity”.
Personally, I think we are much smarter than Mr. Gunderson portrays us to be and getting smarter each day. He does conclude that using a 401(k) or similar plan is part of a whole plan. But by then, you wonder if you can unpaint yourself from the corner he claims you are in.
His article can be found here.
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