What is the hot topic for our age group now? Not the Republican and the Democratic Conventions. They will not solve the problem I am talking about. I am talking about the 401(k) retirement plan for the typical American worker. The problem is not with the good intentions of the government, be it democratic or republican, all along the way, but rather with the employee / investor who allowed it to happen in the first place.

Notwithstanding our differences in culture, ethnicity, gender-orientation, etc. every employee who works for a corporation in America (or wherever) has one thing in common; and that is a 401(k) retirement account provided by the employers. Sub-section 401(k) of the Internal Revenue Code defines a type of retirement plan funded primarily by the employee to build for his own retirement. This plan is relatively new having been implemented as recently as 1978. The first set of retirees who are depending on this retirement scheme are yet to test its delivery on its promise made. In case you don’t know, these 401(k) plans have promised big capital appreciation through stock market investments, matching funds from employers, professional management, tax-deferrals and more. If you live outside USA you will have a similar retirement plan in your country.

Australia – Superannuation System
Canada – Registered Retirement Savings Plan
France – Special Retirement Plan
Singapore – Central Provident Fund
United Kingdom – Pension Provision
Germany – Betriebliche Altersversorgung

We will call all of these similar plans, as 401(k) for simplicity. 401(k)s and mutual funds are synonymous and that’s wherein lies the unintended consequences. The intended goal of this article, though, is to open your eyes and make you discover for yourself whether or not 401(k) retirement plan is helping you achieve your retirement goals. I am not going to pull any punches because it is vitally important. This could very well be the most outrageous highway robbery ever performed on the public at large. This robbery is 100% legal! Yes, the massive financial organizations that sell mutual funds have the blessings of governments to help themselves to our hard earned money. With financial freedom hidden away under the watchful eyes of these trusted financial companies, we could concentrate on working hard in the here-and-now. The future is taken care of by people smarter than we are and who cared about us. Eventually, we would count on our massive 401(k) savings to take care of us too. The financial institutions are pushing the idea that the problem is our fault because we haven’t saved enough money. Nothing can be further from the truth. It all started with companies parting ways with the traditional defined pension retirement programs for their employees. Instead, they offered the employee contribution plan, the 401(k), with the government’s blessing and the sponsorship of big financial institutions. The 401(k) system is and will continue to be a failure if we expect it to provide the middle class with the retirement they deserve through their own hard work.

Here are the reasons:

The financial industry skims from your account staggering fees. Almost $1,100 Billion a year, equivalent to 1.9% of global gross domestic product, is the impact on clients which includes $300 Billion in excess fees for actively managed long-only funds that fail to beat their benchmark!

The retirees are caught in a race against time because 401(k) tries, supposedly, to build net worth rather than cash flow. 401(k) is only a small golden egg rather than a golden goose. When the egg is gone, it’s back to work. Having the golden goose is more important than stockpiling golden eggs. Defined pension plan is a golden goose whereas an employee contribution plan is stockpiling golden eggs.

401(k)s have created an entire generation of people who are investing without understanding. They are financially dependent.

The bulk of the investments in a typical 401(k) is made up of mutual funds and they are subjected to systemic and non-systemic risks. We were sold on the idea that there is enough diversification to take care of reasonable risks. The diversification can only take care of non-systemic risk and the bigger and the most dangerous systemic risks still exist at large. The dot-com bubble burst, sub-prime mortgage meltdown are all systemic risks and there is no protection available in your 401(k)s to handle these risks effectively. The Rip Van Winkle market, between 1998 and 2009 where the growth rate is zero will have negative growth in your account because you still have to pay the management fees. Financial institutions through mutual funds that are created out of the employee’s contribution accounts amass large asset under management (AUM is their mantra on which their compensation is based) and they cannot care less about the employee’s financial future.

Your 401(k) account will only increase in value if the market goes up. The overall economy is shackled by debt problems that will not go away anytime soon. Big gains are pipe dreams. I believe that the dire situations with sovereign nations debt will inflict massive systemic risk on all of us. In that setting, traditional 401(k) programs are not designed or equipped to protect you from such unprecedented systemic risks. This means that every time a systemic crash occurs it pushes that retirement date further and further into the future.

The quantitative easing underway by all central banks is causing massive devaluation of the currency resulting in inflation, which reduces the value of the account.

401(k) is supposed to be one of the three legs in retirement, the other two being, the social security and defined pension plan. There are no more defined pension plans, the social security is on thin ice, not guaranteed and we are struck with only one.
Even though the SEC (Securities and Exchange Commission) does its best to regulate the industry, it is impossible to truly protect the ignorant. Laws and regulations are no substitute for experience and education.

Again, the culture of the 401(k) system has trained us to think we can’t become good investors on our own. If this continues, the system will continue to breed less intelligent and less successful investors. We run the risk of becoming voluntary slaves to a financial system that takes our money and leaves us with a bit left over. In other words, we are heading down a path that is the opposite of Emerson’s statement:
That which we resist in doing becomes harder for us to do; not that the nature of the thing itself is changed, but that our power to do it is decreased.

With the subprime meltdown, the hungry institutional lions preyed on uneducated borrowers. With 401(k)s, these institutions are turning their hungry fangs to the uneducated investors around the world.
Less than 20% of the investors around the United States understand the mandatory distribution of their 401(k) that begins at age 701⁄2. Even fewer can articulate the difference between the defined benefit plan and a contribution retirement plan.
Apathy is easy, but can cost you a bundle in the long run. Is it because we’re lazy? Or maybe we think that somehow a hero on a white horse will ride in at the last minute and add several zeros to the numbers on that quarterly statement? In this story, there is no savior but you. No one but you has the reasons and motivation to change the way the story ends.
Placing our money in investments we know little about, such as 401(k)’s mutual funds, means that we are giving up control. And giving up control puts us at risk.
With new information we can look at problems and make educated decisions. We don’t have to be dependent on others. We can overcome knowledge gaps to become proficient at new things.
As the government continues to mess things up by making poor decisions, we can improve our own lives by countering with good decisions. It all comes down to developing the desire to overcome the things that have been holding us back. With the right training, we have the ability to become a better investor than we ever imagined. This is what freedom is all about: using our creativity and intelligence to set us free from the things that would otherwise hold us back.
Don’t be alarmed. You may find you are better at learning new things than you ever imagined. After all, it’s been proven that most people with a little knowledge can outperform the average mutual fund manager. With their sub-par performances over a long period of time, the bar has been set very low.
An eye opening example:

• Your contribution and employer’s match of $1000 at age 20
• At age 65, $1000 grows at an average of 8% per year compounding to $140,000 in a mutual fund account.
• The financial system – the mutual fund system – will take 2.5% out of that return in management fees. So you will have a net return of 5.5% and your $1000 will only compound to approximately $30,000. See how the compounding is acting against you and $110,000 remains with the financial institution.That means the financial system puts up zero percent of the capital and took zero percent of the risk and got almost 80% of the return, and you, the investor in this long time period, an investment lifetime, put up 100% of the capital, took 100% of the risk, and got only a little bit over 20% of the return.
• When you withdraw $30,000 that is treated as ordinary income and not as long term capital gains, i.e., you are taxed at 35% as opposed to 15%! You end up paying 20% more in taxes on your 401(k) money than you will on regular investment capital gains. So in an effort to defer $350 in tax today, this investor will wind up paying over $5,000 more than needed on the original $1,000 put into that 401(k) account.
• We can do much better! REMEMBER: 401(k)s are not the real problem. The problem is not knowing how to invest, for crying out loud!

Before you decide it’s time to move your money out of your 401(k) right this minute, first take a deep breath. It’s not wise to jump from the frying pan into the fire without a plan. Remember, the first leap of is to have faith in your ability to learn and grow.
If you are determined to manage your own investments, you first need to educate yourself. You need to know how the markets work. You need to identify your own goals. You need to gain the knowledge and confidence required to make smart decisions.
There are many resources available for individuals to improve their financial education. The goal there is to make financial education simpler, easier to understand, and truly life changing.
This is your moment to stand up and shine. Now is the time you choose to boldly step out from the false shelter of the 401(k) system and create your own future.
Education minimizes risks and maximizes safety. Don’t just have investments – be an investor. Make investing a life skill.

Excerpts from: 401(k)aos, by Andy Turner, Rich Dad Advisor – Please read for more information on this topic.