Your Assets, Their Gain (Even When YOU LOSE MONEY! )

Remember in an earlier blog post I said that the 401(k) was created by exploiting tax code that wasn’t originally written for the average employee. Also recall that the 401(k) was born in an age where it was more of an augmentation to the retirement savings status quo and not the cornerstone of the long-term savings plan. But there was money to be made with this new approach, and plenty of financial firms capitalized to make that money theirs.

$7.5 trillion tied up in 401(k) accounts.

As I mentioned earlier, according to the Investment Company Institute, Federal Reserve Board, and Department of Labor, there is well over $7.5 trillion tied up in 401(k) accounts. After our discussion about tax deferment, I’m hoping that you start to see this for what it is: a guaranteed annuity for the federal government by way of tax revenue once you start your withdrawals and annual management fees for Wall Street–related firms and their advisors all along the way. These firms and the financial professionals that manage these accounts for their clients are paid on a percentage of the total amount of assets that they have under management.

Fees from advisors alone are usually between 1% and 2%, and the advisor receives his or her payment regardless of how well his or her clients’ investments perform. Now, obviously, the advisor wants you to do better, because 1% of a larger number is a much larger payday for him or her. But if you don’t do well, the advisor still takes a cut. So think about it. When you make a 401(k) or IRA contribution at the age of 35, you’ve basically locked up your money for at least 25 years, and as a result, you’ve locked up a recurring revenue stream for one of Wall Street’s many companies and their advisors.

You would ever sign up for a 25-year contract with your cell phone carrier? So why do you do it with a much more important asset—your retirement nest egg—with some firm on Wall Street? It makes zero sense.

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Now do you understand why Vanguard, Fidelity, Merrill Lynch, and dozens of other financial services companies have armies of advisors working for them? They all want possession of your retirement dollars that are locked up till at least age 59 1/2.

Next time you hear someone say that maxing out a 401(k) or IRA is the first thing you should do for retirement, I want you to take notice for whom he or she works. I guarantee that person somehow works for a company that makes money as a result of your contributing to a 401(k). And it could be directly or indirectly.

“But, wait a minute; my accountant doesn’t work on Wall Street, and he tells me to max out my 401(k) and IRA too.” Yeah, I know. But how do you measure your accountant? By how much he lowers your tax bill, that’s how. If you contribute to a 401(k) or IRA, you reduce your taxes today and you think your accountant is a genius. For most people, taking a tax deduction today is clearly a penny-wise, pound-foolish strategy. But when you notice how your accountant is just one more advisor who is saying the same thing as your stock broker, who happens to be saying the same thing as the guy on CNBC, and is similar to the article you read in the money section of USA Today, you connect the dots and believe that maxing out a 401(k) or IRA must be the best thing for you. Wrong!

Let me be clear. The companies and the advisors that manage your retirement dollars want you to make money. They want you to make a lot of money. I am not insinuating that they are bad people working for corrupt companies. I’m simply saying that Wall Street is the ultimate recurring revenue model and the trillions of dollars that sit in 401(k)s and IRAs employ millions of people around the world and make a lot of people a lot of money, even when you don’t. That’s why you are bombarded with experts telling you to max out your contributions to these plans.

In early 2009 I was at an industry event, and one of the keynote speakers was going on and on about how great a 2008 he had despite the bottom dropping out. Why was it so great? Because his clients, on average, lost only 19% while most consumers were down 25%–40%. Yes, that’s right; his clients lost a mere 19%. But guess what? He still got his 1.5% fee, so, really, his clients lost over 20% because they didn’t get any protection from the crash by spending 1.5% with him that year.

You see how this is absolutely crazy to me. Name me another industry that will not allow you to somehow recoup your money if you are not happy with a product or service. If you go to a restaurant and the service is awful, a manager will come out and discount your check or pay it outright. If a piece of clothing that you just bought has a hole in it, you take it back to the store. Shoot, a company like Costco takes almost anything back even if you have been using it for a year. But your advisor and the companies that he or she works for in the transaction below in Figure 2.5 get theirs no matter what happens to your money.

So are you starting to feel misled? I bet you are. Are you starting to see why maxing out a 401(k) or IRA is not the best way to save for retirement?

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