Beat That Horse Dead…401(k) Finale

Throughout the course of this week (thank you for sticking with me…I promise to never do another “4-part series” unless it’s on a sexy, exciting topic like buying gold or making your first million!) we’ve been discussing three ways in which 401(k)’s suck, namely:

  1. Ridiculous fees that seriously eat into your final earnings
  1. Almost complete lack of control over WHAT your money can be invested in and WHEN you can use it, and
  1. The sneaky taxes that are imposed on you when you finally take your money OUT, which worsens with every dollar you plan to have when you retire (e.g. the richer you plan on being when you retire, the worse the 401(k) “ordinary income” tax hit will be for you)

Man, I could have saved myself a week and just posted those three bullets! But maybe you wouldn’t have believed me without seeing the numbers (heck, maybe you still don’t believe me!).

Today I have one final caution for you regarding 401(k)’s. This one you might initially want to write off as some “kooky conspiracy theory” but hear me out….

4. The Potential for Uncle Sam to “Nationalize” Your 401(k)

Think this sounds crazy? Maybe not so much… Consider the following from a January 8, 2010 article from Bloomberg’s Businessweek, entitled “Retiree Annuities May Be Promoted by Obama Aides” (you can read the entire report here if interested):

“The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.”

Well that doesn’t sound so bad, does it?

But further down in the article, we find,

“Promoting annuities may benefit companies that provide them through employersincluding ING Group NV (INGA:NA) and Prudential Financial Inc. (PRU), or sell them directly to individuals, such as American International Group Inc. (AIG), the insurer that has received $182.3 billion in government aid.”

What? So whom does this really benefit?

I see two clear winners here…the government and large financial institutions like AIG (and do you really want to trust your retirement to AIG?).

Individual annuities are not typically considered “stellar” investments (of course, there are always exceptions, but for the most part, they suck). They have come under regulatory scrutiny over the size of sales commissions and whether some varieties are “suitable” for older investors, and have been criticized as being expensive and offering little inflation protection. Sounds like a terrific place to be “required” (forced) to put a portion of your 401(k)/IRA, huh?

Additionally, many fixed income annuities invest at least a portion of their funds in none other than U.S. Treasury Bonds, which I contend are one of the biggest bubbles on the planet right now, and where I would advise you notto place your money at any cost (possibly for the short-term while the mess in Europe plays out, but after that, look out below!). And that’s in addition to the fact that the worst possible time to convert your lump sum savings into a fixed annuity is when interest rates are at all-time lows…such as, oh, now, for instance!

But I’m sure our greedy government would love nothing more than to be able to legally grab the almost $5 Trillion in individual retirement accounts and sweep it into U.S. Treasuries. Once again, great deal for the government, lousy deal for you.

If you think this is crazy, just “talk”, and would never really happen (I did too, until I dug into the issue myself…), you’re in for a potentially rude-awakening… it already HAS happened in many countries all over the world:

  • Argentina in 2008 and in 2001: The government nationalized private pensions, which provided it with “much of the cash it needed to meet debt payments and avoid a second default this decade.” You can read more about it in this WSJ article and this UK Telegraph article.
  • Ireland, 2011: The government raided citizens’ private pension funds to help pay its banks’ debts. From this WSJ article, “Dublin’s so-called “jobs plan,” released this week, includes a 0.6% levy on private pension funds that will last four years.”
  • Bulgaria, 2010: In October of 2010, the government drafted a plan in which nine private funds worth approximately $300 million would be transferred to the government. After enormous protests by trade unions, the government relented somewhat and “only 20%” of the plan will be implemented. You can read more about Bulgaria’s grab in this article…
  • France, 2010: In November of 2010, from this Financial News article entitled, “France seizes €36bn of pension assets“, we learn that the French parliament decided to earmark €36bn from the national reserve pension fund, Fonds de Réserve pour les Retraites (FRR) to reduce their short-term pension deficit.

While I certainly hope this doesn’t happen in the U.S., we’re unfortunately not off to a great start ourselves. Remember, just as recently as this summer, our very own U.S. Treasury raided public pensions until it could get Congress to finally raise the debt ceiling. Doesn’t exactly bode well for the future.

With government debt and deficits at absolutely staggering levels, it’s definitely not something to just write off as “crazy talk”…you can’t afford to.

So What Can You Do?

OK, so I’ve told you a lot about why I don’t think 401(k)’s are the be-all end-all for your retirement, but assuming you agree with me, what can you do? If you’re like most Americans, you have at least some money somewhere in a 401(k) or a non-Roth IRA.

I have IRA’s, too. My pre-Kung Fu Finance self dutifully contributed the “max” to all of her 401(k)’s and now has a plethora of IRA’s. Here are a few options for you:

1. Roll your IRA over into either a self-directed IRA or better yet, an Open Opportunity IRA. Kung Fu Guy and I have done this with several of our IRA’s and now legally hold physical precious metals and other investments inside of our IRA’s. While this doesn’t protect you from the taxes you will incur on taking your money out eventually, or from the possible seizure aspect mentioned above, at least you now have more control over your investments (MUCH more control) and can potentially earn much better returns for yourself.

2. Convert to a Roth IRA. You can consider this…while I have not done this personally it could make a lot of sense (it is extremely dependent on your personal situation so consult with a qualified/certified tax advisor). This could protect you from the eventual tax hike (although you will have to pay all of your current taxes due now, so that’s a big tradeoff). As long as the tax rules don’t change, this would help you with the tax burden, but doesn’t address the other issues we mentioned.

3. Cash Out. Not for the faint of heart, as you will incur a 10% penalty AND owe all current taxes, now. I did this with two of my IRA’s (after many arguments with Kung Fu Guy), and I am extremely happy that I did so. It has worked out very well for me, but your mileage may definitely vary, so think hard about this one…I don’t recommend it for everyone– only if you are absolutely convinced you can do better outside of an IRA structure (I was).

Finally, if a 401(k) *does* work for you because of your personal situation, then stick with it, but please invest outside of it, too….it will be very dangerous to “just” count on your 401(k) to provide you with a secure retirement.

There you go….Horse. Beat. Dead!

Good luck with your decision! I am pulling for you!

To your financial success,

—Kung Fu Girl

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