Thrifty Thinking: Hidden Dangers of Conventional Retirement Plans

In "Will the Financial Frailty of Retirees Increase?” CRR concludes future retirees “will get less of their income from Social Security and traditional pensions and more from financial savings in 401(k)s.” This exposes them to new risks, including accumulating too little wealth to withstand financial shocks, and finances that “are increasingly exposed to market downturns.” That’s number one on Pamela’s list of hidden dangers of traditional retirement plans.

“Overwhelming evidence shows that these plans haven’t given people the financial security and predictability they deserve and expect,” she says.

Conventional retirement savings plans including 401(k), 403(b), IRA or Roth IRA plans include hidden dangers, including being:

1. Tied to the stock market and all its volatility. Over 77 percent of the savings in these plans are invested in volatile equities and mutual funds, dumping risk on uninformed retirement savers.
2. Subject to seemingly small fees that take a huge bite out of your savings. According to the Department of Labor, fees of only 1 percent per year can slash the value of your savings by 28 percent over 35 years, assuming a 7 percent annual return.
3. Administered by unqualified people. In many companies, people with no training or education in this area make the important decisions about 401(k) plans. A study from the Center for Retirement Research at Boston College found that plan administrators choose mutual funds that lag far behind comparable indexes.
4. Vulnerable to conflicts of interest. Many advisors have revenue-sharing arrangements with the funds that pay them. This may restrict your choice of funds and result in you paying higher fees.
5. Subject to change. Once you’ve put your money into a 401(k) or similar plan, the government and your company can change your plan’s rules and participation rates with little or no notice.

“Remember, it’s your money, and the investment results stemming from your decisions will determine whether or not you have a secure retirement,” she says.

p.s. About the Author:  Pamela Yellen is founder of Bank On Yourself, a financial investigator, and the author of two New York Times best-selling books, including her latest, “The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future.” Pamela investigated more than 450 financial strategies seeking an alternative to the risk and volatility of stocks and other investments, which led her to a time- tested, predictable method of growing wealth now used by more than 500,000 Americans.