June 14 2016
Retirement

When Your 401K is Terrible

401 K scam, feesThe realization of how little my retirement savings has amounted to is one of the main motivations I have had for starting this blog.  I have been working for nearly two decades, I’m a reasonably smart girl and I have always put money into my 401K.  We all know that we should be putting money into our 401K’s – it’s the holy grail of financial advice.  And I did. Yet, somehow I do not have a lot to show for it.

A few months ago I came upon this Forbes article by John Wasik which, to me, was mind-blowing.  I learned that the fees on some 401K plans are so high that, especially for younger workers, they actually outweigh the tax benefit of 401K’s.  Um, let me say that again – they Outweigh The Tax Benefit.  WTF.

Naturally, I took a look at my 401K…

Sure enough, except for one fund that was available for a 1.48% fee, which is not good, the rest of the fees were all between 1.73% and 2.93%.  Not one had a ten year return higher than 9.21% and the average was closer to 6%.  And I did not have the option to put my money in a low cost index fund, which is what I wanted to do.  While my 401K has stagnated, the little savings I have squirreled away in my S&P mutual fund has exploded through the years.  Because index funds beat these expensive managed funds all the time.

If you are still reading, you need to watch the John Oliver segment on this topic.  I was practically throwing things at my television watching it because I am so hot on this topic and because it is so not cool. Most people do not realize that the “financial advisors” managing our retirement funds are not fiduciaries, meaning they do not have to put our financial best interest first.  It is an astonishing and ludicrous fact of life that continues because, like so many astonishing and ludicrous facts of life, most of us are just not aware.  But this is slowly changing.  Investors are winning lawsuits over this issue and there will probably be more to come.

So, what do you do when you realize your 401K is a low-performing disgrace?

Armed with this info, I went to my employer and graciously enlightened them, asking for a fixeroo.  It didn’t happen.  And I am truly considering closing down my 401K and rolling it into my IRA which I control. I am no financial expert but I am invested in index funds, a few mutual funds, one or two delightfully fruitful stocks that my dad made me get, Intel being one, and everything is very dividend oriented.  I thought the dividend income alone was a mistake on my tax return this year, it has grown so much with dividend reinvestment. My portfolio has done great and compared to my 401K, I look like Warren Buffet on a Ritilan bender.

I have a few other issues with my 401K, which help make the case for getting the hell out.  My employer does not match.  Because of this, we have low participation.  And if you have really low participation at your company by the “less highly compensated” employees, there is a perception of unfairness, which the government seeks to remedy by limiting how much money the people who do participate can allocate to their 401K.  So for two years in a row, I have gotten money back, because I went over my limit.  Even though – by no means was I contributing aggressively.

Long story short – sucky funds, high fees, a big limit on what I can contribute and no matching funds.  I think I am done with this scam!

 

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  • That is a rough combination, but I am not surprised – I changed 40%+ of my allocations when I took a look a few months ago due to insane expense ratios and poor performance – it is a little easier to swallow now and if it wasnt for the tax break and (crappy) match I wouldn’t put money there

  • I’m torn about how losing my 401K lowers my ceiling for tax free retirement investing but between the fees and the extremely poor performance compared to the S&P, I am filling out the paperwork to roll it over into my IRA, where I’ll make my own contributions. I am pulling the trigger – it just seems like common sense. If there was a match, would be a different story, of course. But my big lesson is, you do need to put thought into whether it’s worth participating in your company’s 401K. For most people it is gospel that you just do, but I don’t agree.
    Brooklyn Bread recently posted…Hi! We’re the Gun Industry…My Profile

  • It is funny you link to the John Oliver youtube clip. I shared it on my fb page last week. I work in the mutual fund/retirement plan industry so I am very familiar with fees. I try to contribute enough to get the max employer match and then contribute the remainder to my IRA account where the fees are lower.

  • I’m so with you when you talk about how furious you are that these “advisors” don’t have to look out for us! It seems like everything is stacked against us in trying to do the right thing anymore – no wonder we’re all fed up. Enjoyed the article – certainly is food for thought.

    • Thank you so much, Shelly. And thank you for stopping by and commenting. I’m glad you enjoyed. As it turns out, taking control of my retirement savings was the best thing I ever did. It was up 6 percent almost immediately, though a coincidentally well timed exit right before Brexit definitely helped. Can’t take credit for that, but the S&P is definitely a huge improvement from the awful expensive,moorland performing options Inwas limited to.
      -Linda

    1. shelley 10:15am 28 August - 2016 - Reply

      I’m so with you when you talk about how furious you are that these “advisors” don’t have to look out for us! It seems like everything is stacked against us in trying to do the right thing anymore – no wonder we’re all fed up. Enjoyed the article – certainly is food for thought.

      • Brooklyn Bread 11:17am 28 August - 2016 - Reply

        Thank you so much, Shelly. And thank you for stopping by and commenting. I’m glad you enjoyed. As it turns out, taking control of my retirement savings was the best thing I ever did. It was up 6 percent almost immediately, though a coincidentally well timed exit right before Brexit definitely helped. Can’t take credit for that, but the S&P is definitely a huge improvement from the awful expensive,moorland performing options Inwas limited to.
        -Linda

    2. Tia @ Financially Fit & Fab 09:14pm 19 June - 2016 - Reply

      It is funny you link to the John Oliver youtube clip. I shared it on my fb page last week. I work in the mutual fund/retirement plan industry so I am very familiar with fees. I try to contribute enough to get the max employer match and then contribute the remainder to my IRA account where the fees are lower.

    3. Brooklyn Bread 09:18am 17 June - 2016 - Reply

      I’m torn about how losing my 401K lowers my ceiling for tax free retirement investing but between the fees and the extremely poor performance compared to the S&P, I am filling out the paperwork to roll it over into my IRA, where I’ll make my own contributions. I am pulling the trigger – it just seems like common sense. If there was a match, would be a different story, of course. But my big lesson is, you do need to put thought into whether it’s worth participating in your company’s 401K. For most people it is gospel that you just do, but I don’t agree.

    4. Apathy Ends 10:11pm 16 June - 2016 - Reply

      That is a rough combination, but I am not surprised – I changed 40%+ of my allocations when I took a look a few months ago due to insane expense ratios and poor performance – it is a little easier to swallow now and if it wasnt for the tax break and (crappy) match I wouldn’t put money there

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