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Reviving the Wooly Mamouth or Surviving the 401(k) Scam

It’s just a drop in the bucket of mostly misleading information but this post deserves attention:

The 401k Scam by By Nathaniel Downes

The Demos report is an eye opener as to the hidden costs which cause 401k programs to not only fail to keep up with inflation, but to fall behind even the base amount invested into these funds.

What they found was that, for the projected samples that the 401k would lose over $155k for its entire lifetime. Since the entire sample fund at the time of retirement would be $320k, that means a full third of the money which was put into the system was taken by the 401k itself in the guise of fees.

How does this work you may ask? The report goes into detail, but we shall give a simplified example here.

First, your 401k funds are typically put into mutual funds, so let us first address those.

If you put $10,000 into a mutual fund which lists a 3% return, it sounds good, yes? But that is after the fees are deducted. These fees are listed as a percentage of your total investment, but they are deducted from the revenue generated. You get $300 added to the $10,000, but that was after the $150 in “expense ratio,” mutual fund fees such as marketing fees, management fees, and administration feeds, as well as $150 in direct transaction fees have been removed. Your $10,000 had earned $600, but half of that was eaten up in fees. And it does this each and every year. $300 every year for 40 years gives you $12,000 in total fees deducted, more than your original investment.

After some easy to follow charts and more explanation he goes on to describe how pensions are different:

By comparison, a pension plan is a form of insurance, similar to what you would find for your automobile or your healthcare. Money taken in is used to pay out for those who have met the qualifications for payment. Many of these systems use surplus funds to invest in stable, fixed investments, such as treasury bonds. Social Security works in this manner, surplus funds paid in go into a special trust fund filled with US Treasury Notes, pre-paid cash in effect. The trade-off for this is that the amounts paid out are not directly owned by the individual, they are a large pool that all tap into.

(post title stolen from a comment following the post)

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22 Responses

  1. It’s good to see a discussion about this scam. I never understood when it happened how the 401(k) was supposed to be better an a pension.

    Until Riverdaughter started talking about it, I didn’t realize that it was never intended to be better for us.

  2. Over 30 years ago I bought a WHOLE-life insurance policy from Northwestern Mutual (be very careful about the company you buy from). I have had a better return on that policy (cash-value earned) than any of my friends have had on their investment instruments– after they noticed how they were getting screwed by fees. Of course, some of the stock investors did much better that I but most of the mutual fund types and quite a few of the stock watchers lost money.

    I was in a mandatory meeting and a friend (math teacher, of course) challenged the salesman on the fees and return on investment on the guys 401k’s. The tap dancing by the salesman was astounding to behold.

    • Whole Life and Annuities are financial instruments that generate a nice fat up front commission for the salesperson. Most Whole Life used to be sold to you by friends and relatives, whom you trusted. What you want instead is term. Term when you are young and it is cheap, and instead to put your money in 401K’s that you manage and Ira’s that you definitely manage. And not a Roth.

      The Ira’s and the 401K’s were financial instruments to pump new blood into Wall Street. Very few people in the mass market understand finance – Obama is a perfect example – and this is to your disadvantage and their glee. Math instruction in our schools enables math illiteracy just as it enables reading illiteracy. Does anyone really think our govt and corps really want superior critical thinkers who are experienced readers? Does anyone think they want sophisticated math customers? C’mon.

      And all those newspaper columnists who churn out this stuff for you are imbeciles. If you want a superior investment mind then you want to acquaint yourself with Martin Armstrong. No link as if you are really serious and want to learn you won’t need a link. He’s so fucking good the govt had him in jail for a long time and in solitary.

      Michael Milkin also went to jail for his “junk bonds” which was the only way to finance the companies that led to the internet. Bill Gates started out with DOS. How do you sell bonds on a code? He had no real estate, company assets, nada, just a CODE and by doing this got them off the ground. All this is the dirty little secret so be careful.

      Now if you really get curious and want to learn something, then you can really do your 401K instead of repainting the celler or kitchen cupboards to increase the value of your home, but your time spent learning this stuff is well worth it. Just sensitize yourself to the market. It is the air you breathe and the sea you swim in.

  3. To the best of my limited historical knowledge, employEES NEver asked for the “401k”. EmployERS shoveled their employEES OUT of pensions and INto 401ks to drop the time and attention needed to police a pension and also to divert money to their social class comrades in the financial ripoff management community.

    The only realistic hope of defense that someone lucky enough to even BE employed going forward would have . . . is to rigidly avoid their company’s 401k and invest that money in personal survivalism instead. In fanatical debt paydown, in mortgage principal paydown to zero, in making sure one really has unchallengable title to the house one thinks one owns, etc. Then, superinsulate the house, put in every
    feasible local onsite skywater harvesting system, scientific waterless composting toilet system, electricity production system within reason, yard-based super-intensive foodgrowing capacity, etc. If one has children and the children object to the austerity lifestyle necessary to invest one’s work-earned money in personal and family survivalism semi-outside The System, one can invite one’s objecting children to run away from home and pursue the lifestyle to which they would like to become accustomed . . . on the street.

    Counter-System survivalism may still be possible, but only for those still-employed people who even realize it exists and who pursue it.

    (Of course those who have “403bs” or other such semi-pensions will be understandably tempted to trust The System and leave their retirement money in them. I know I still am, and still do.)

    • Do NOT – DO NOT – pay your mortgage down. Unless you have a damn good reason for doing so. Debt is in your favor in inflation. You want to pay off your mortgage (debt) in inflated dollars – worthless dollars. You want to take that money, that capital, and put it in financial instruments that go up in inflationary times. They are going to try to wring one more out of us. The huge danger now is that the entire world is in a conspiracy in this, and since it is total, there is nowhere to run. There were trillions involved in the 2008 derivative crash Margin Call: http://moviesandfilm.blogspot.com/2012/04/margin-call-seeing-it-through-post.html?zx=ac01273ed3bb5576 All those numbers transferred as CODE with a click of the mouse, have had the federal printing presses going 24/7 for Obama’s entire term. That is an amount of cash that has been put in the system unlike any time before. They are trying to inflate, counting on you’re not noticing it until it is too late so they can save their own butts.

      We are living in dangerous times. They would rather see prices soar than drop and drop and drop. Who is doing well right now? The Thrift Shops. The DAV is now being run by another company. It’s not a mom and pop volunteer operation anymore. It is big time.

  4. Well, I entered a comment and it vaporised. If it is hidden in moderation somewhere, perhaps it may be permitted to emerge.

    • . . . . and so it did . . . .

        • And thank you. I hope the comment proves useful somehow and not just me venting.

          • I loved it! Thanks. Particularly the fanatical debt pay down. And I don’t know if you mentioned it but, making your current house as comfortable as possible within your means. Adding a wind turbine (and they exist now for residential use) perhaps…. Not really any point in keeping money at 0 interest in a bank if you can make use of it for your life-long comfort.

          • Have you seen our weird spike in activity on Jump the Shark? What are we missing in the news today?

          • To Katiebird actually,

            A financial analyst named Scott Burns wrote a couple of books about aspects of this approach. One was called Squeeze It Till The Eagle Grins. http://www.amazon.com/Squeeze-It-Till-Eagle-Grins/dp/038503279X

            The other is called Home Incorporated: The Power Of The Household Economy. I can’t find it mentioned anywhere on the internet, not Amazon, not anywhere. Not even here.http://authors.simonandschuster.com/Scott-Burns/44344098/books

            So how do I know it even exists? Because I have a copy. Maybe it was considered so subversive that every traceable copy was hunted down and destroyed. Maybe my copy is the last copy on earth. I hope not. That would make me the object of sudden interest by sinister forces.

            I grew up in a less debtogenic age so I find myself to be debt-free now. It is certainly easier to stay debt free than to become debt free.

          • RU, who is the author of that second book? And the publisher. My inner Librarian won’t let it rest.

          • The second book is also by Scott Burns. I strongly believe I have the title remembered correctly. Any good library would have a copy, one hopes. The Ann Arbor library used to have a copy. I haven’t checked lately.

          • I don’t know or remember the publisher, though.

          • I think this is the second one? The household economy : its shape, origins, and future

            I just placed a hold on this (they’ll have to get it from another library). When I recover my strength, I’ll put a hold on the other one too.

          • I think that could be it. I think it may have come out under different titles at different times. The one I have is definitely called Home Incorporated and I think it is subtitles Harnessing The Power of the Household Economy. But I think this is the same or very nearly the same book.

            It doesn’t just contain creative ways for individuals to think about wealth, money, production.survival, etc. The last two chapters offer a crushing criticism of the whole concept of economic growth and growth economics. Years after he wrote that book he moved to Texas and went Conservative and retreated severely from what he had earlier written. His current (and archived) Houston Chronicle financial advice columns are very interesting at the personal mechanistic financial-survivalism level though.

          • Cool! We live a pretty streamlined life but, I’m always looking for ideas.

  5. good post

  6. OK. It depends whether your 401K is managed by the corp you work for. If they hold it hostage there is nothing you can do as the money managers decide. When you leave, are fired, laid off whatever from that corp you have x number of months to switch it out and then you can control it.

    Many moons ago I warned riverdaughter about this when she talked about her own 401K after being laid off.

    To decide what to do with it – unless you really want to manage it yourself – I have always advised getting Forbes magazine’s most recent January issue. In that issue all mutual funds are rated as to performance. You get 20 years, 10 years, 5 and last year. For a 401 K you will want the longest and best performing one they list. But wait. That used to be the Magellan Funds a long time ago and Peter Lynch was the big honcho running them. When he retired, it became a whole new ballgame. Their past performance which was so excellent with Lynch will skew the stats on it, maybe making it look better than it really is. I don’t know as I haven’t been immersed in this stuff for 3 decades now. But this is the way to narrow your choices down to a manageable number. Then you find out who manages the ones you are considering, how long they have been there, how old they are (see if they may retire soon) etc. These funds will each contain a family of funds and you will get so many – or fewer – switches within the fund per year. Now here is where you have to take some responsibility.

    Engrave this on your forehead: When gas is going up, gas is not going up, the dollar is going down in worth. the A-rabs are not stupid. They do not want to sell their finite oil for lousy dollars and will demand more of them when our dear govt is inflating while telling us inflation is going down. You will know in your gut every time you go to the supermarket. So if you are fooled it is your own fault and I can only say you must want to be fooled.

    I am not saying you will score, but you will be able to protect yourself. Do you know the Rule of 72? If you don’t, don’t do anything until you know it.

  7. Looks like all my intelligent advice disappeared. Thank you RD. I’m sure anyone who could have benefited won’t get to now.

  8. The Rule of 72: 72 divided by that 3 percent = 24 years for your money to double. Gee. How about that. And during those 24 years the dollar has devalued how much? So you don’t even get to break even AND they have had the use of your money for 24 years. Great deal!

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