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Is the 401(k) Finished?

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Why some of the earliest proponents of the 401(k) regret their support…and why you need to build your financial ark today

"We weren't social visionaries."

Those are the words of Herbert Whitehouse, a former human resources executive at Johnson & Johnson who was one of the first to usher in the 401(k).

"It was oversold."

Those are the words of Gerald Facciani, the former head of the American Society of Pension Actuaries. He helped defeat an effort by the Reagan administration to kill the 401(k) in 1986.

The misgivings of the early proponents of the 401(k) are chronicled in a bombshell article from the "Wall Street Journal", "The Champions of the 401(k) Lament the Revolution They Started."

According to the article:

Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence as the dominant way most Americans save. Some say it wasn't designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days.

Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers while making it easier for companies to shed guaranteed retiree payouts.

Financial hindsight

As they say, hindsight is 20/20. And it's now clear that the 401(k) has helped usher in a retirement crisis in America. As the WSJ reports, "Fifty-two percent of U.S. households are at risk of running low on money during retirement, based on projections of assets, home prices, debt levels and Social Security income," and "Roughly 45% of all households currently have zero saved for retirement…"

Still, there are defenders of the plan. If only people would actually save money at a healthy rate in the 401(k), it would provide all that was needed for retirement. A healthy rate was considered 3% of your income with an assumed 7% annual increase.

Proposed plans to dump the 401(k)

In fact, it's this ethos that is behind proposals to force contributions by employees to the plans or another government run plan. Again, as the WSJ reports:

Ms. Ghilarducci wants to ditch the 401(k) altogether. She and Blackstone Group President Tony James are recommending a mandated, government-run savings system that would be administered by the Social Security Administration and managed by investment professionals. While both are Democrats, they believe their solution has bipartisan appeal…

Others are calling for a national mandate on savings or requiring companies to automatically enroll participants at 6% of pay. Sen. Marco Rubio, the Florida Republican, has proposed opening up the federal government's Thrift Savings Plan, the 401(k)-style plan for federal employees, to private-sector workers.

This same Teresa Ghilarducci calling for a mandated government savings plan "offered assurances at union board meetings and congressional hearings that employees would have enough to retire if they set aside just 3% of their paychecks in a 401(k). That assumed investments would rise by 7% a year," according to the WSJ.

The 401(k) math simply doesn't work

Ghilarducci has since come to realize that the math doesn't work. Many thought it did due to bull markets in the 80's and 90's, but the downturns of the 2000's erased much of that wealth. Today, the market is raging again, especially since Trump's election to the presidency, but there are already rumblings that we are at the tail end of a bull run and getting ready for a major plunge into a bear market.

What does this mean? Those who are finally catching up from the losses to their 401(k)s from the last recessions could be in for yet another crash that could decimate their retirement savings yet again.

Is the biggest stock market crash in history coming?

Of course, I predicted this scenario in 2002 when I wrote "Rich Dad's Prophecy". In that book, I predicted the worst stock market crash in history. Why? Because starting in 2016, the first wave of Baby Boomers began retiring. And where is there money for surviving during retirement? In 401(k)s. By law, the 76 million Baby Boomers will have to take distributions from their 401(k)s as they retire.

Couple this pressure of mandatory withdrawals with the fact that China is slowing down considerably and in danger of a downturn, and you could see a major collapse in the stock market. The result would be catastrophic.

So what should you do?

Build your financial ark

My advice is to build your "financial ark". By this I mean to truly diversify your investments outside of just paper ones. Invest in commodities like gold and silver. Find investments that provide cash flow through rent or dividends rather than rely on appreciation. Invest you money in things that can hedge against inflation.

Most people will not have the financial intelligence to do this. Rather, they will continue to dump money into their 401(k)s, if they save anything at all, believing the old financial lie that saving enough for long enough will ensure a strong financial future. That's a lie that not even the earliest cheerleaders of the 401(k) believe any longer.

The rules of money have changed. It's time you changed with them. If you don't, you'll have only yourself to blame.

Original publish date: January 10, 2017

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