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Highlights from this episode include:

  • The political fluke that accidentally created the entire 401k plan and the $5 trillion industry that surrounds it (2:25)
  • What professional investors do, and how to avoid losing it all when the next “dot-com bubble” rolls around (5:05)
  • The difference between “smart money” and “dumb money” and how not to go broke figuring it out (5:32)
  • These three foundational building blocks make up the world’s most secure retirement plans. How many do you have? (6:34)
  • This part of the 401k code could legally suppress the balance in your retirement account, forcing you to work until you die (7:49)
  • The insidious lie you’ve been told about employer-matching contributions and why they aren’t really “free money” (8:54)
  • These options can make your company’s 401k plan a goldmine… or a money pit. Make sure you get it right. (12:01)
  • These hidden penalties are increasing the cost of college for parents who are just trying to do the best for their children (16:30)
  • How your 401k steals control of your finances from you (21:31)
Read Full Transcript

Do you hate the thought of working past 55 or 60? Do you hate not being able to live the life you deserve today? Do you hate not knowing what your financial future looks like? It's time to stop doing what you hate, here's your host, Mr. Harold Green.

00:19 Hello. Hi everybody. Welcome to the show. This is Harold Green and it is time to stop doing what you hate today. Show 10 reasons why your 401k probably sucks. Again, 10 reasons why your 401k probably sucks. How's your week going? So far? My week is going okay. Interestingly enough here in Hawaii, we're in February and I think it was about 60 something degrees this morning when I woke up over the weekend, it's supposed to be 64, 62 and you guys are probably saying, shut up man. Why are you complaining about 62 degree weather? Well, here in Hawaii we wear shorts pretty much year round and anytime the weather dips into the, maybe even the low 70s and high sixties, it gets a little chilly. So this morning getting ready for work, open up my, my sliding door and it felt that cold breeze come in. So I decided to take out my flannel shirt, so put on some khaki pants, a flannel shirt, and I almost put on a beanie this morning coming into work.

01:16 I don't think that was a good look. So khakis, spinal shirt and a beanie. I don't think that looks like investment management material. But anyway, it's Friday and it's time to get ready for the weekend. And so you guys ready? One, two, three less get it. So one of the things that we want to take a look at when it comes to your 401k or your 401k is the history and where 401ks came from, but I gotta I gotta tell you, it was created by this guy named Ted Benna. I guess that's his name. And he's widely regarded as the father of the 401k, which was born about 40 years ago with the passage of the revenue act of 1978. And I was reading on, I think it's barrons.com you can go check it out, but it says the former benefits consultant didn't write the 869 section of the tax code that paved the way for the plan, nor did he set up a to reimagine how Americans save for retirement.

02:17 That's a big one. Yet through what he calls a political fluke and his own interest in helping a client, Ben played a role and doing just that and in the decade since assets and 401k plans have swelled to more than $5 trillion and the impact is probably double that if you count rollovers and things of that nature. So right now there's a ton of money sitting out there in the and the five to nine plans and so it was in the fall of 1980 he says that I was helping a bank client redesign his retirement program and I basically fell into this as the potential solution for what they were trying to accomplish. It was a matter of putting some creative pieces that hadn't been done before. He was basically trying to help out a client get to a better position by taking advantage of what most people were just simply passing over.

03:11 I did the same thing with the rapid retire program, created this plan that puts people in position to retire seven to 10 years sooner. And so I'm going to throw out the disclosure to you so there can be no guarantees may that you will be in a position retired seven to 10 years sooner or any specific period time. Results of the program are going to vary and we're going to be talking about investments today cause your 401k is an investment. So past performance is no guarantee of future results. All investments including real estate are speculative in nature and involve substantial risk of loss. And I encourage our investors to invest carefully. I also encourage investors to get personal advice from their own professional investment advisor and to make independent investigations before acting on information that we publish. I do not in any way warn or guarantee the success of any action you take and reliance on statements or recommendations that I make on my show.

04:03 So you're going to have to be responsible for your own investments. And so, but I want to get into this 401k thing because it has done some tremendous help, but it's also done some tremendous harm to people over the years in one period of time that I can think of in particular is that.com bus because everyday people were the most aggressive investors and that.com bubble, right? People were just throwing money at this thing left and right. It seemed like it couldn't do anything wrong. But basically when smart money was getting out, okay, the unsophisticated investor or the non-institutional investor was putting money in and by 2002 100 million individual investors had lost about $5 trillion in the stock market. People just were not, they just didn't know what they were doing. And so I see a familiar trend going on right now, so, so apparently there's smart money, AKA what we call institutional investors and dumb money or AKA non institutional investors.

05:13 And that's not my term. That's just the term that the investment world puts on people. And not to be a little anyone or call anyone dumb. It's just a term that they have out there AKA non institutional investors. So I'm just making a point that they feel that there's smart money. Maybe there are people out there that have no not so smart money. So some big investors are, are softening their positions and tech or growth and moving towards the value and dividend growth types of stocks. And I've kind of done the same thing, a little similar. I've realigned my tech portfolio, softened up a little bit on them moved more towards fixed income and a consumer cyclical consumer staples, consumer discretionary just until volatility goes down a little bit. And then I'll do some different things. And of course that's just a little bit about my sauce and how I do things.

06:00 But I'm just wanting to give you a little peak and give you much more. But if you're really interested in more, you can go download that rapid retire brochure at retirenowretirewell.com click on the game changer. Submit that and I'll be in touch with you. But to be honest, okay. People who are in position now, I feel with at least a million dollars in their accounts and some sort of pension plan that includes medical benefits are in the best position to retire. I'm saying that based on a history of working here in Hawaii with the federal employees, the state employees, the city, the city workers, any, anyone who has a pension or works for a union, depending on how much you have in your accounts and what your benefit packages right now, could be the best possible time for you to walk out that door. Okay? In some cases, people are getting a little greeting.

06:46 I've seen them get burned tremendously by not walking out of their job at the right time. So if you're in a similar position, let's talk ASAP, but let's get into the 10 reasons why your 401k plan could suck or may not be working in your absolute best interest. All right, here it goes. Number one, contribution limits. So let's do a little recap of what the contribution limits are. They've been raised okay for 401k plans. Roth 401ks four for three BS, four 50 sevens on and on and on. So in 2020 it's up 19,500 that's the max you can put in. It was up from 20 2019 and 19,000 and if you're an account holder or an investor in a 401k, who ha who, who has reached the age of 50 or older, you can make ketchup contributions of $6,500. And so that's a potential of $26,000 that you can put into that 401k or retirement type plan.

07:43 Now, there are some people out there who are able to contribute a lot more, but those guys are, are being handicapped. So in this situation, here's my thing. It may make more sense for that individual based on their financial plan to stop contributing to the 401k, pay the taxes minute and then invest outside the plan. But you gotta run the numbers. And I know it seems like a very crazy idea not to take the tax break right up front, but hear me out. When you look at the opportunity costs and also due to some of the poor investment choices that you could be facing in your oral and K plan, it could potentially make sense for you to stop that, pay the tax and put the money somewhere else. And one thing you might be thinking right now, you may be screaming out saying, Hey Harold, what about the matching?

08:34 It's free money, right? Well, here's the deal about matching money or anything else in life. There is no such thing as free. Everything is going to cost you something. Even you sitting there in your car driving, listening to my pod show is costing you time to hear me. Maybe sit here and rant and rave about certain things, but it is costing you something. Okay? Number two, matching percentages. So what is a good match? There's a, there's quite a few formulas out there that deal with matching and if push came to shove and I had a 401k plan, which I do not at the moment, I'd rather have a match than no match at all. So some of the common methodologies are 50 cents for each dollar contributed up to 6% of the pay or 22% of 401k plans out there. Offer multi tier matches such as $1 for each dollar saved on the first 3% of pay and then 50 cents for every dollar contributed on the next 2% of pay.

09:36 There's some pretty good companies out there with some pretty good programs and if you're fortunate enough to work for one, maybe the 401k is, it is good for you. So hear me out through this whole entire podcast show. One of the great companies out there that are offering pretty start 401k is Boeing and they automatically contribute 3% to 5% of pay to a 401k account on the behalf of the 401k participants. So you're getting three to 5% of your pay before you even put anything in. And so, but in order to take full advantage of your matching formulas, you have to fund the account. And the average 401k contribution right now is around six to 7%, which in some cases is just enough to get the match. And so in my opinion, matching could be giving people a false sense of security.

10:28 Okay. That, that they're going to have enough and their plans to retire on. It's just my hunch based on everything that I've seen in working with people who have pension plans and 401ks now, no other reason why your 401k plan could suck is the platform functionality. What do I mean by that? What is the first thing you see when you log into your 401k? How easy is it to navigate? Some of them, like Transamerica, they give you a retirement forecast based on what you're saving and putting in, you know, if it's sunny or if it's gloomy, you know that that could be a heartbreaker right there. If you're not able to put enough in your 401k and you have a, a gloomy retirement outlook. And here's the problem with that. You're looking at that and you haven't even sat down and created your long term financial plan.

11:17 So how do you know or how does that software and know what your overall financial planning situation looks like? It doesn't, it's just something snazzy to get people interested in con contributing to their plans and changing what their potential retirement outlook looks like. But to me all of the hype in the 401k is short lived and some cases because of point number four. And that is your investment choice when you're investing in your 401k. Most 401ks that I see have limited options. It's basically a bunch of funds, probably 30 or so. And when we break them down, it goes into large cap, mid cap, small cap set matter, national stuff, some bond, mutual fund, stable value and target day funds. And here's, here's the thing about the target date funds. A lot of employers felt that people don't know where they're doing well, therefore Onk so they had to put something in there that would allow them to choose where they put their money based on a time to retirement or a certain level of risk.

12:26 And I've seen, I've seen so many people in the wrong target date fund that is, it's just maddening. And I don't know too many advisors that will recommend a target date fund, especially, you know, if they're helping you pick out the investments in your 401k, which some some advisors do, but most don't. And so here's the deal with the 401k is more complexity could be opening the door for employees to make poor decisions. And I'm going to be very real with you right now. Most employers know you have no idea what you're doing when it comes to investing in your retirement dollars in your 401k. And it's just like colleges. They know. Parents have no idea when it comes to filling out financial aid forms or, or planning for college. So what do employers have to do? The employers have to protect you from you.

13:10 And that is the rationale for limiting your investment choices. And in some cases the more robust platform could be costly or for them as well. Now another point as to why your 401k may suck is lost opportunity costs. We're going to look at our 401k versus traditional IRA versus the Roth IRA. Now I'm going to make a point and say and just put my neck out there. Roth IRA I feel is one of the best things that young people can do that are in a very low tax bracket. If you're in a very low tax bracket, you can put away monies, okay? You're already not paying a lot of taxes on your income anyway, so early on in life when your income is not that high as the best time to contribute to a Roth IRA plan. The only thing is is you got to make sure you have enough funds outside of your plan to cover your big ticket items without blowing into debt.

14:08 Again, make sure you have a great long term financial plan that has everything taken into consideration before you continue to or before socking away tons of money into a retirement plan. Now the difference is the Roth IRA outside of the 401k in the traditional IRA outside of the 401k, they have lower contribution limits, but the beauty is they have a lot more investment choices. Okay. So if you're only gonna put in a small percentage of your, you know, your income into a 401k, you may just want to look at the Roth IRA or the traditional IRA. Again, if you're just not going to put that much in any way, the beauty is you have a lot more choices to invest in outside of a 401k than you do inside of a 401k. Okay. Number six. The reason why your 401k probably sucks is penalties for accessing the funds.

14:58 As you guys know, you can't touch the money until you're 59 and a half. Okay. Why? Because the money is supposed to be used for retirement, not, not everyday life. Again, they were trying to protect you from you and have a question for you. Are you so financially irresponsible or do you think that you're so financially irresponsible that somebody has to lock up your money away from you so you don't blow it? Yes or no? I don't think you are. Okay. But again, they do have penalties for people who just can't control their spending. I did another show, I think a few days back or so about America's spending crisis and people they're spending is out of control. One point 5 trillion or one point 6 trillion in student loan debt, one point 3 trillion or so in credit card debt. One point 1 trillion in credit card debt.

15:52 It's just, it's just through the roof. So some of these penalties they put on these plans are great because it does protect some of the people who just can't control themselves. Okay. Number seven. Another reason why your 401k plan probably could suck is there are hidden penalties for using your funds for college. What are these? What are these hidden penalties? Well, here's the thing. When you pull money out of your 401k plan and pay for college, right? You're not penalized by the IRS for taking the funds out. You only have to pay income tax on that distribution when you're using those funds for college. But here's the hidden deal. Colleges are going to count that money as income against your expected family contribution. So the more money you're pulling out to pay for college, the worse. The worst is going to be why that income artificially inflate your expected family contribution doesn't necessarily mean you make that much.

16:47 But when the colleges see that NIF viewport money's out in order to pay for in order to pay for college, it's just gonna hype up your EFC and makes it look like you can afford way more than you actually can afford. So pulling money's out to pay for college is probably, in my opinion, a very bad idea based on everything that I've seen. The number eight reason why your 401k pal plan probably sucks is because the fees now, when the 401k plans were originally created, it was a way for the employers to gain a tax break by funding or putting up percentage of revenues and side of the plan and also to to be a win win for the employee as well. The other thing it did was it helped allow them to switch the responsibility for retirement from the employer to the employee.

17:39 In other words, getting out of some of these pension plans that were super, super expensive to administer and to guarantee benefits for employees well down the, even though companies may or not be making money or making that type of money that's needed, support that pension in the future. And so what, what's happening now is companies have found a way to pass the phase on from themselves to the participants. What do I mean? If you look at your 401k, some of the fees range from one and a half percent, a 2% depending on the plan and the employer doesn't pay that. That money comes out of your investment account. So if you're paying fees that high for limited investment choices, I mean to me that that's a bad idea in and of itself. So just the fees themselves could be prohibiting your, your growth and stagnating your growth in the account along with having limited investment choices.

18:36 And so, especially if it's just a bunch of mutual funds, number nine, access to advice from the plan advisors. And a lot of the plan advisors do not give detailed financial advice based on a long term financial plan to the participants. You can call into the hotline and they'll tell you, you know, so what do you want to do? And you're, and you're like, I don't know. You guys are the plan advisors. What should I be doing? Well, we don't all because we don't manage your long term financial plan. And so you're both sitting there like, what do we do? Scratching our heads? And so people do what they think is in their best interest and they buy funds or they invest in things in their plans, will no advice based on the outlook of their future. Number 10 and here's the biggest reason why many 401k plans suck.

19:19 There is no brokerage link. Okay? There is no brokerage link. What does a brokerage link? It gives you the ability inside of your 401k to set up kind of like a fidelity or Schwab TD Ameritrade where you can go in and pick your individual stocks inside of that plan versus being stuck in a bunch of mutual funds that may be outperforming the S and P or they could be drastically underperforming the S. And P. You have to go in there and do your research, but most people don't know this stuff. But the brokerage link will allow you to invest all or a portion of your 401k and, and the visual stocks. And I think that's one of the best things some corporations have allowed their employees to do, is to again, work with an individual advisor and to pick funds inside their portfolio that matches a long term financial plan.

20:15 And one of the challenges I see is there could be some limitations set on that brokerage link regarding how much of the 401k can be placed in the brokerage link, which sometimes it's half. Okay. So half of your 401k has to be in, in a mutual funds inside of the 401k plan. And then half can be sitting outside of that. Another limitation I see is the type of investments that you can use in the burgers link. Sometimes it's, it's mostly mutual funds and then it's even limited to certain types of mutual funds, which I think sucks because if it's going to be mutual funds, you should have the option to go into whichever funds you want. And then sometimes in the, in the plans there are certain stocks you can and can't buy. That could be a limitation as well. And so here's a, here's a bonus for you.

21:01 And yeah, 11 401k loans are capped at 50K or half of your balance and they have to be repaid within five years. Now the biggest issue with this is you have taxable money that you're paying back into your 401k that's locked away, that you can access until you quit your job or you retire. That's after tax money that you have no access to. Okay. Question. Why lock away money that's already been taxed and an account on horrible investment choices, bad, bad, bad idea. So what are some of the things that we can do to get out of this mess? Number one, you can look into what I call an ISD. What's an ISD? It's called an inservice distribution. You can check it with your plan administrator and see if you're eligible for an in service distribution and in service distribution will allow you to roll over some or all of your company's 401k and to your very own IRA.

22:09 Okay. Or B type of plan outside of your employer's plan. I think this is one of the best things that they will allow you to do because if you're trapped in a plan that has bad investment choices, okay, this could be a game changer for you. Some of the things you can do to get out of this, number two is if it's in your best interest, okay? Longterm to stop funding your 401k and then find some kind of alternative solution for tax breaks and then also saving for the long term, AKA self-employment. If you can start your own business, then maybe it's not necessary to rely on your 401k for the tax breaks. Maybe you can create your own tax breaks and then invest outside of a 401k because you have more choices. Number three, what you can do is you can, let me see if I can take over and manage your 401k according to a long term financial plan that that you and I put together.

23:04 You and I can sit down and put our heads together and say, Hey, this is what I think is in my best interest. This is what I want to do, and then we can begin to invest her 401k plan according to that. Of course, we do charge fees for that and that's found in my ADV on the website, so you can go to the main page of my website and check on the click on the ADV and I'll tell you what the fees are. They're not that expensive, but if I can generate 15 2030 40% sometimes 60% return in your 401k, if we can do that and you have the potential for that just by making different choices. I think the fee is nominal and Apelles in comparison to the benefits that you can get out of that. Okay. So if you have a brokerage link, I can research all your options and then create a strategy that's going to potentially help you maximize your plans.

23:51 Growth potential is just that simple. It doesn't have to stay stuck and you can make moves to put yourself in a better position. Now I Pete sharing with you folks about going to the website, retire now, retire wow.com and so what is retirement now? Retire. Well and then, and then how did I come up with that? So to me, retire now, retire while comes from a mindset regarding a person's retirement situation. I believe that you don't have to continue contemplating the same issues that everybody else is contemplating around retirement. Such as, you know, should I work for a few more years to get a bigger pension or should I keep going into the houses? Paid off? And here's a, here's a shocking stat I found by some folks doing research out there at Oregon state university. I think the researcher's name was chin Chi Wu and they said it may not apply to everybody, but we think work brings people a lot of economic and social benefits that could impact the length of their lives.

24:51 And, and in some of the retirement studies I've done for, I'm a retirement income certified pro professional, they're saying guys have a higher chance of dying once they retire then than women do. Why? Because women throughout their lives, they know how to socialize. They know how to get together and do different things, have lunch with friends, guys are more, in some cases they're more reclusive. They are more to themselves and you know, they have the macho man mentality and they, they're not good at reaching out and making friends and then explaining, you know, about what's going on with their life. So they have a lot of frustration and, and things of that nature. And so some people tend to die like right after they retire. And I think that's a horrible way to go. And so retire now, retire. Wow. It's focused on planning that that gets you out of your current job.

25:40 And into the kind of retirement life that you probably have always dreamed of. You know, the time and freedom, but we have to do it in phases and steps. And so you can transition from orchids life mindset to there is more to life than work mindset and I think retire now, retire while mindset coupled with the rapid retire program. It is planned centric and it's based on making moves that are based on timing. So if you are say at the age of 55 or 60 and you really want to see if there is a way to just move on, reach out to me and let me know, fill out the game changer form. I'll get in touch with you. We can go through some different scenarios before we talk fees and prices and all that stuff and figure out if we can get you to live in the life that you really want so that you can stop doing the things that you hate. Maybe stop sitting in traffic, maybe stop dealing with the knucklehead at boss, maybe stop dealing with some coworkers that are just causing you so much stress. So if you're in that situation and you think you're ready, give me a call. Okay. And we can figure out

26:44 How to make this work for you. Until next time you guys, one, two, three. Let's get it.

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