What is behind the hype of “qualified plans”?

(401k, IRA, TSA, and similar plans.)

1. Financial institutions, represented by financial planners, promote putting money in their “retirement savings box”. They know that locks, in the form of taxes and penalties, will keep it there for their long term profit. They also know it creates dependence on their “lending box” to finance our ongoing needs and wants, forcing us to pay out a volume of interest dollars that is far greater than we can earn. On balance: they win, we lose.

2. Government promotes such plans knowing that many “participants” are forced by circumstance to use “their” money before maturity, causing heavy penalties on withdrawals or multiple income taxes on loans from the plans. Ultimately, government owns an “annuity” on our lives with guaranteed tax paydays as long as we live and windfall profits when we die. Plan participants are the government’s money farm.  (Name one economically viable reason for penalties other than governmental greed.)

3. Financial planners promote such plans knowing that tax laws guarantee they will be regularly called upon to handle roll-overs of large bundles of locked-up money, earning big commissions every time. So, “Max your contributions baby; we’re here to help”!

4. Employers promote such plans, taking credit for “enabling” employees to put their own money away. Some have matches, but they disappear in tough times and pale in comparison to the “old days” when 100% of retirement plan money came from them.

5. The account statements would be fraudulent in any other industry. They create the illusion that what you see on the statement is yours. 100% of “contributions” are shown as an account balance, hiding the fact that unpaid and totally unavoidable taxes are a very large part of that number. It’s a deceptive practice. It is virtually impossible to withdraw anything near the amount shown. Other financial vehicles require so-called “full disclosure” – why not 401(k), IRA, 403(b) and other “qualified” plans?  

6. Maximum “contributions” promote the illusion “this is so good we’ve got to limit it!”.

7. Plan administrators consistently break laws requiring “full disclosure” and “investment suitability”. Out of hundreds of participants interviewed, NOT ONE knew the facts or completed a fact finder to determine if participation was even appropriate for them.

8. Most participants anticipate lower taxes at retirement. However, deductions for mortgage interest and children will be gone. Income tax rates, not capital gains rates, are applied to every penny taken from qualified plans. Tax rates are subject to the whims of Congress. At one time the marginal rate was 70%! Does it make any sense to defer payment of 15% only to pay 30%, maybe even 70%, later?

9. Much of estate planning is about schemes to bypass children and pass plan money to later generations, hoping to avoid the “tax bomb” built into 401(k), IRA, and similar plans. This proves the problem, and begs the question “do I even know who I’m saving my money for?” We urge you to ask yourself that question now, and to make sure that what you do will achieve what you actually want.

Whether its fraud nor not, financial planning totally fails to acknowledge the economics of personal finance. “Features” of 401(k), IRA, and TSA type plans are only attractive on paper, the financial planner’s “showroom”. But, we don’t live in showrooms. We have real cash flow needs, face real change, uncertainty, and events in our lives over which we have no control. We believe that plans must be “tested” against the environment of reality, not the artificial “boy in the bubble” environment.

Food for thought: In Africa, monkeys are caught by cutting a hole in a tethered coconut and placing a nut inside. With the monkey’s hand closed around the nut, it can’t be removed. Rather than give it up, the monkey is caught. Isn’t there a correlation to financial freedom?