By Hippies/For Hippies - Retirement Planning and Investments, Why They May Be Bad

Why these are maybe bad things – Retirement planning and investments. Read on...

(April 2012, Marie Gage)
Retirement planning and investments – What you need to know so you can ask the right questions.

I want to share some facts with you on pieces of our economic system. Those that drive our economy and our emotions. They are not left or right driven as to how they are presented here, they are just facts. I suppose that it does matter which side of the government that represents our nation initiated or rallied support for the legislation that allows these facts to have come about. I do not look at problems that way. There is a root cause, and once found, counter measures can be proposed.

Whether or not you feel that abortion should be legal, or even that the wealthy pay more taxes, it does not matter because facts are facts. It appears to me that if the side one is not aligned with proposes or discusses solutions to a problem, even if it is a good solution, it will be shot down without even being understood because it came from the “other” side. One side cannot be correct on all matters that we face collectively as a nation. If that were so, then the problems would all be solved when that one party was in charge of things. And it’s not. So get over who proposed what. Look at the facts, and then decide what you think is the best way to proceed. For the record, I am fiscally conservative and always have been. I want to be sure that when I am old I have funds to take care of myself.

That being said, let’s talk about some facts that you should consider before investing in a 401 (k) or other retirement plan. I do not have much sympathy for investors that lost all their money because they were too lazy to do the math, to know the risk that they are exposing their money to. Greed consumes even the poorest of us, and if you cannot accept that in order to gain great returns, then there is probably great risk involved, whether or not the financial advisor you are using has explained them to you. My motto is Caveat Emptor! (buyer beware) and it should be yours as well. But hey, I shouldn’t “should” all over you. Let me tell you what I do know and what I have found that most people do not consider. Many of us are far too busy and trusting to know how these financial vehicles work.

Up until 1974, most private and public corporations used what was called a Defined Benefit Plan (DB), commonly called a Pension Plan, as a benefit offering to their employees. Some of them were likely used by the employers for things other than their employee’s retirement. So fear was instilled in the public and a law was passed that allowed for Defined Contribution Plans (DC) to be offered to employees. The selling point being that these DC plans could not be squandered by unscrupulous financial money managers. What this really did was shift the burden of retirement offerings from the shoulders of the employer to that of the employee. The employee is in charge of his or her own future, not a pension manager. Now an employer could offer to match or otherwise contribute to these funds, but the costs and the responsibilities for the employer were lifted. Regulation and expense of the previous Defined Benefit (DB) plan made for a better bottom line when it came to profits.

The 1980’s saw DC plans skyrocket. The average US citizen that previously did not have the means to participate in Wall Street, now felt like they had achieved a new status by being allowed access without having to have huge dollars to invest. In 1975, DB plans numbered around 200,000, with DC plans being only slightly higher. Today, DC plans number around 650,000, and DB plans have flat lined at the 50,000 range since 1995. The number of contributors in 1975 was around 35,000,000 for DB Plans, around 15,000,000 for DC plans. Today, those numbers reflect around 40,000,000 for DB plans and 80,000,000 for DC plans.

What has happened is that Wall Street has control of 4.1 trillion dollars of working people’s funds instead of having those funds in a pension trust managed by a few people at the company an employee works/worked for. Wall Street tapped into a never-ending stream of funds that it previously could not access on a regular basis for the past 40 years. 46% of all the mutual funds in this country are funded by DC plans. In addition, if the market goes down, no one is accountable for the loss, even if the principle invested is lost. No one is responsible except for the worker, he has been deemed to be in charge of his future. With the previously used DB plan, there were regulations and repercussions should those funds be lost or stolen.

Another fact to consider with the DC program is the dollar match system that most corporations dangle in front of the employee. Many plans do not allow these funds to become yours, for you to be vested, until you have been there for at least 5 years. Employers lay many of the employees at the worker level off before that vested period has been attained, thereby saving themselves even further funds by not having to contribute at all to their employee’s retirement.

Prospectuses of any fund that the employee invests in can be difficult to understand. It is also not made clear the true amount of return on one’s principal that a fund is generating year over year. A fund may boast that it has generated an average of 8% over the past 10 years. This statement can be misleading as it is not always clear how those figures are derived. If they take the percentage of returns or losses for each year, then add them up, and then divide by 10, they can boast 8% when actually, if those funds invested 10 years ago took a huge loss in one or two years, the principal might not have even been regained. They are not lying to you, just presenting the facts in a manner that appears attractive. I will not say that all funds are bad. Not all people that go to Vegas lose either.

I know that people that are currently retired that had a DB plan have a healthier investment and many were able to take early retirement. I know that people that had to retire in 2002 have still not recovered from losses their funds received in the 18-month period that preceded it. I know that most of us do not have a choice, or perceive that we do not. Free money! We are told; do not be a fool and turn down this tax-free offer. The broker and people that manage these DC accounts are certain to make money, whether you do, and even if you lose your principal investment.

Another fact to consider that as the baby boomer generation is retiring; these funds will have to start paying out. One of the differences in the DC plan versus a DB plan or an IRA is that the retiree is required to take mandatory payouts. This law was passed in 1987.Many people with a DB or IRA had been leaving them untaxed and passing them on to their heirs. The government instituted mandatory payouts and you will be taxed at whatever the income tax rate will be at that time. As these payouts are withdrawn from the fund, the fund cannot generate as much interest as the working capital will be reduced. Wall Street will have a diminished amount of investors, which will not have a positive effect on the market as a whole.

So what can you do? Stay tuned...for Part 2! In the meantime, the first thing you need to do is look at what you have been doing with your funds that you may have invested in a 401(k) program. Understand the risk these funds are at and ask yourself what should happen if you lose it all. Consider that there are no guarantees in the market, and that there is no crystal ball that will let you know what the tax rates will be when you are mandated to withdraw these funds. Consider that Wall Street executives and money managers do not make their wealth by investing their own personal money, but by charging you a fee to manage your money. Consider that the government, by allowing for the creation of the DC plans, has deemed that you, not Wall Street, not your employer, are in total control of your financial outcome. Consider that Wall Street was bailed out for their bad investment choices, but that you will not be.
(Worldwide Hippies, http://www.worldwidehippies.com/2012/04/30/why-these-are-maybe-bad-things-retirement-planning-and-investments/)