How to break America’s 401(k) addiction

[Contributed by reformedinvestor]

This is my favorite excerpt taken from the interview between Steve Kroft of 60 Minutes and Brooks Hamilton, who Kroft interviewed in his expose on 401(k)s.  Hamilton is an expert in designing retirement plans for large corporations.

“The fact is that the typical 401(k) investor is a financial novice. They don’t know a stock from a bond. And we give ‘em a list of 20 or 30 mutual funds with really, really powerful names, you know, they sound like, ‘Gee, that’s where I want to have my money,'” Hamilton said.

“What are the, generally, the quality of the mutual funds in 401(k) plans?” Kroft asked.

“Mediocre,” Hamilton replied. “I’m being real honest with you, with half the funds on the list really dogs, what people would characterize as dogs shouldn’t be on the list to start with.”

So many Americans believed that the 401(k) would be the sure-fire way to safely save for retirement.  In fact, it has been reported that 401(k) plans that have become the primary source of retirement income for 60 million Americans. Companies would match our contributions making it irresistible to sock away money in these mutual funds.  But the truth is, as exposed by 60 Minutes a few weeks ago, that companies turned to 401(k)s as a cheap alternative to offering costly pension plans.  This decision created millions of new employee investors in Wall Street – creating a boom on Wall Street and putting trillions of dollars of investable cash into the hands of unsophisticated investors.

In the 60 Minutes piece, however, experts in the field say that Wall Street more than cashed-in on this phenomenon by offering employees what is categorized as “dog” mutual funds that shouldn’t have been offered in the first place.

So now that Americans know the flaws in the 401(k) system, how can they go about breaking their 401(k) addictions?

Here are some ideas:

Look Elsewhere: Look for alternative places for your money. With most companies are backing away from offering company matches (which incentivized people to sock away even more money in their 401(k)s), it has never been a better time to seek alternative advice and alternative strategies.

Read and Learn: Just by reading a few good books on the topic of investing outside of Wall Street, you can learn so much. Jeff Nabers is coming out with his first book to address this topic called, “Unlimited Investing:  Break-Free from Wall Street to Build Real Wealth with Alternative Investments,” (I know this is a little self-promotional, but this book is amazing!)

Explore Outside Investment Vehicles: While companies make it convenient to save for retirement through direct deposit of savings into a 401(k) account, an investor can easily set up an automatic bill pay to make regular contributions to another savings vehicle that gives them more options.  If you want to continue to invest in securities, look into other IRA options where you have more control over the funds you can invest in.

Bonus for the Self-Employed: If you have any sort of self-employment income (which many of us do from side jobs), you are eligible to set up a Self-Directed Solo 401(k), which allows you to invest your retirement funds in real estate, gold, private companies and without taking a distribution.  Plus, all the income made on these alternative assets is tax-deferred too.  Imagine having your retirement money free to invest outside of Wall Street – it’ll make you wonder why you were restricted to investing in only securities in the first place.

Ask Your Friends: Chances are you have some friends who are doing well. Ask them their secret and how they’re doing it.  In the book, “Rich Dad Poor Dad,” the author Robert Kiyosaki says that friends of the rich only ask for a loan or a job – but no one ventures to ask how that person got rich in the first place.  You may find your friends are willing to share their investment strategies with you if you took an interest in learning.

I hope these tips helps you on your journey to break your addiction from your company’s 401(k) and take control of your finances.

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