A Recipe for Retirement Disaster
What exactly is in your 401(K)?
Recently, I met a young woman in her early twenties who had just landed her first big job right out of college. She told me excitedly about her salary, her signing bonus, and her 401(k).
"So what exactly is in your 401(k)?" I asked.
She looked a little confused. "Well, it's a standard 401(k). My employer matches my contributions."
"Yes, but what exactly goes into your 401(k)?"
She had no answer. I didn't expect her to. Very few people know exactly what they're getting in their 401(k) or how much it's actually going to cost them.
Millennials especially have little understanding of their retirement plan at the beginning of their work life. To them, retirement is decades away, something to worry about when their knees start aching and their kids go to college.
They have some idea of how they will pay for retirement, but aren't taking active steps to put a plan in place. In fact, a report from Merrill Lynch and Age Wave showed that Millennials expect to use personal means to fund 65% of their retirement, but 42% haven't even started saving money.
Many of them see investing in a 401(k) as a solid plan for right now, until they can earn enough money to invest more substantially. But what they don't realize is that what goes into these plans is a recipe for disaster
The 401(k) recipe
I've said it once and I'll say it again: the 401(k) is the single worst way to invest your retirement savings.
Thousands of Americans rely on employer-sponsored retirement plans, but they have no idea what they're paying for or where their money is going. They sign away control over their retirement, and don't think about trying to get it back until it's too late.
The 401(k) has become less of a retirement "plan" and more of a retirement "cross your fingers" recipe, with lots of unhealthy ingredients thrown in. With a lack of financial understanding, and some strong misunderstandings about where they're money is going, Americans have relinquished control over their future, leaving them with an absolute mess.
Which leads me to my question: Do you know what's really in your 401(k) "plan"? Let's walk through some ingredients you didn't know were packed into your retirement plan.
1) Hidden fees
The first thing you should know is that your 401(k) is sprinkled with hidden fees that are buried in pages of legal paperwork. Legal fees, transaction fees, bookkeeping fees, and more. Plus, the mutual funds in the 401(k) often take 2% off the top.
These fees may not seem like a lot when you sign on the dotted line, but overtime, compounding cuts down your returns substantially. Jack Bogle, the Founder of Vanguard, puts it like this: "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?"
The worst part? Most Americans are completely unaware that there are any fees on their 401(k).
Tony Robbins' latest book Unshakeable devotes several pages to breaking down the damage the 401(k) has done to Americans' retirement. He cites an AARP report that shows 71% of Americans don't realize they are being charged fees on their 401(k) plan. That's 7 in 10 Americans who have no clue that their 401(k) isn't free, and is actually charging fees on everything they put away.
In addition, 92% have no idea how much they are actually paying for their 401(k).
These hidden fees water down the returns, destroying all your well-intentioned saving and investing. If you don't know about these fees, you're putting your money (not to mention your future) on the line.
2) No knowledge or control
The worst part of the 401(k) recipe is that you aren't even the chef in this game. Instead, you're sidelined, watching other people prepare your retirement buffet for you.
As an employee, you have absolutely no control over your investment. If you were to take your money and invest in in the same mutual funds and stocks as the 401(k), but on your own terms, you would already have 100% more control over your money than an employee who goes with the employer-sponsored program.
That's because most employees don't get to opt out of the 401(k). And when they invest, they have no voice in which mutual funds they put their money into.
Would you ever make a purchase where you don't know everything you're paying for? When you buy a house, a car, even a shirt at the mall, do you just blindly hand your money over, hoping for the best? Of course not! But that's what happens with a 401(k) plan.
An article from Entrepreneur says, "With 401(k)s, I've seen environmentalists who are unknowingly invested in big oil, and anti-smoking advocates invested in big tobacco. Simply put, 401(k)s teach people to be unconscious while investing."
Unconscious investing? Sounds more like gambling to me. When you put your money in a 401(k) you rely on other people to conduct due diligence and invest in quality funds that uphold your philosophies and produce a return. But you will never meet the people investing your money. You'll never have a conversation about your financial goals or your retirement plans. You'll never look them in the eye, instead you'll just hand over your money and hope for the best.
That's not a retirement plan. That's jumping off a cliff without a parachute.
3) External factors
When you cook a recipe, there are lots of things that can go wrong. Your oven could overheat or your ingredients could be out of season. In the same way, the 401(k) relies on and is governed by multiple external factors, reducing your control over your investment even more.
For example, the 401(k) depends on the stock market. Whether the market rises or falls, your money pays the price. You could lose half of what you've put away overnight if the markets fail. Your retirement hangs in the balance and you have absolutely no control.
In addition, the 401(k) is subject to government control, and as we all know, Washington can change its mind pretty quickly. The rules and regulations governing your 401(k) could be altered, new laws can be passed, and you could be dealt a very poor hand.
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Add it up
Hidden fees + No knowledge/control + External factors = Your Retirement
It doesn't make the prettiest picture when you look at it all together. That's because the 401(k) leaves you powerless, subject to hidden costs and the tides of the stock market, with no say in anything but your contribution amount. If you follow this recipe exactly, you'll end up with a mess for a retirement.
It's time to take back control and become the chef in your own kitchen. It's the only way to ensure you have a secure and prosperous retirement, cooked the way you like it.