If you’ve been a subscriber for a while or you’ve read my new best-selling book, The Bank On Yourself Revolution, it’s no secret that at the end of the day, I’m not a big fan of the 401(k).
Or the IRA, 403(b), or any other government “blessed” and controlled retirement account. There are many reasons for that. This recent blog post I wrote reveals one big problem – mutual fund fees, which are likely devouring far more of your savings than you realize.
But in the last couple of weeks, there have been new studies revealing just how devastating to your financial health a 401(k) can be:
Recent 401(k) Wealth-Killing Revelation #1:
A new academic study by two Yale and University of Virginia professors argues that millions of workers have been ripped off by excessive fees charged by plan sponsors and advisors to these plans.
The study concluded that…
The fees charged in excess of an index fund entirely consume the tax benefit of investing in a 401(k) plan.”
It also concluded that because 401(k) balances go up with every payroll deposit, only a thorough rate of return analysis – which workers never really have time to do – would reveal whether workers are also successful investors.
This echoes what the Bank On Yourself Authorized Advisors consistently find when going over a client’s investment account. Most can only hazard a guess at what their rate of return actually has been, and those guesses are almost always significantly higher than their actual results.
According to the most recent edition (for the year 2012) of the 401(k) Averages Book (the most recognized source for non-biased, comparative 401(k) average cost information), the average total plan cost for a small 401(k) plan is 1.46% per year. And the average annual cost for the large plans is 1.03%.
The Department of Labor states on its website that a fee difference of even 1% per year will reduce your account balance by 28% over a 35-year period, assuming an average 7% annual return. And clearly most 401(k) participants are paying at least 1% per year in fees.
The fees in IRA plans aren’t bargains, either. The Government Accounting Office (GAO) recently found that at one of the largest IRA providers, the annual advisory fee is 1.5% of assets for accounts with balances up to $500,000.
Recent 401(k) Wealth-Killing Revelation #2:
Just because you can take a premature withdrawal or a loan from your 401(k) doesn’t mean it’s a good deal.
The Internal Revenue Service collected $5.7 billion in 2011 from penalties, meaning that Americans took about $57 billion from retirement funds that they weren’t supposed to.
Taking a 401(k) loan is an option available to many. But there are many strings attached to it, including how much you can borrow, what you can borrow it for, and how and when you must pay it back. And if you leave your job for any reason, you’ll typically have to pay the loan back in full, with interest, within 30-60 days, or you’ll owe taxes and penalties.
And you thought it was YOUR money!
This is just one of many reasons stashing your savings in a Bank On Yourself plan makes a great alternative. You can access your money…
- When you want
- For whatever you want
- Without filling out nosey applications or lengthy paperwork
- You can pay it back on your own schedule
- There are no late fees or black marks on your credit report if you miss some payments
- While you do pay interest on policy loans, that interest ultimately benefits you. Learn more about how policy loans work in our Consumer’s Guide to Policy Loans.
- You don’t have to sell or liquidate your assets to access your money
- And your plan continues to grow as though you had never touched a dime of it!
Does it feel like you’ve put your money in prison in your 401(k) or IRA? You have. But it doesn’t have to be that way! Find out how you can take back control of your money and finances when you add the Bank On Yourself method to your financial plan.
It’s easy to get started when you request your FREE Analysis, if you haven’t already:
You’ll also discover the guaranteed value of your retirement savings on the day you plan to tap into them… and at every point along the way!