Some of the biggest scams and frauds, seemingly well-intentioned, were created by Wall Street. If you’re thinking Bernie Madoff, think bigger. I’m talking about the 401(k) program.
During my corporate career, all employees were being encouraged to put money into 401(k). It was introduced to us as the right thing to do – to save for retirement. To encourage us to sign up, it was set up such that the company was matching each employee’s contribution – as in buy one, get one free. It sure seemed like a no-brainer to part with my hard-earned, pre-tax money.
One problem. There was no training on how to invest in 401(k). It was like being thrown into an investment ocean with no swimming lessons at all. I simply trusted that company management was doing right by us. When asked what kind of investor I was, I simply answered “aggressive” without having had the foggiest idea of how it was being translated; i.e., what mutual funds were being bought and sold on my behalf. While hindsight is 20/20, I’m certain that those who were promoting it within the company honestly believed in its benefits themselves – just like the rest of us.
After the market crash of 2000 when the funds dwindled in my account without recourse, I realized that we were all guinea pigs for the 401(k) program. I finally began looking into the origin of 401(k). I learned that it was never meant to be for those who had no prior investment experience. Over a decade later, in April 2013, PBS ran a program entitled, “The Retirement Gamble.” (I wrote about it in May 2013 on this website. )
Within the PBS program (for the segment that starts at 7:51 and ends at 8:15), Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research, said, “We know after 30 years of this 401(k) experiment that people do worse in 401(k)s than they would have if their money was in a traditional plan or if it was in a plain vanilla retirement account.”
Here is the edited transcript of an interview of Ms. Ghilarducci, conducted on October 25, 2012 by Jason M. Breslow, Digital Editor of Frontline. It’s worth a read, especially if you still have funds invested in 401(k). Of special note: “… the mutual-fund industry have (sic) been able to protect themselves (sic) against regulation that would expose the danger and price of their products.”
There you have it. Because it was so new when it was rolled out, no one understood what it was – except, of course, those on Wall Street with fraudulent minds that sold them to corporations. There was no way the government could have stepped in and protected the future retirees from the dangers of 401(k), either.
Was it the government’s fault? I’d say not. The government cannot be all-knowing; after all, it’s a collection of people who are learning about new things just as the rest of us are. In fact, I prefer not to expect the government to get involved in anything other than national security.
The biggest takeaway from my personal 401(k) fiasco is that, when it comes to protecting your financial future, the sooner you realize that no one cares about your money more than you do, the better. Find something that you know is a safe investment because you are in control of its destiny from start to finish. For me, that safe investment is real estate. Learn to invest in your first single-family-residential property the correct way – with monthly positive cash flow. It is easy to say but involves a lot of hard work to make it happen. Don’t buy another unit until you will have proven to yourself that you’ve had a minimum of 12 consecutive months of positive cash flow. Once you will have learned to do it the right way with your very first property, every subsequent purchase becomes easier.
It took me 15 years to be able to make the above statement with confidence. You can be on a much steeper learning curve than me.