Are there too many hands in the cookie jar?
There are five major problems with tax-deferred plans at work, whether you have a 401(k), 403(b) or another plan at work. Here are 5 reasons your plan may be a bad investment:
1st Problem: Limited Choices.
For most, this provides two challenges: the limited ability to screen your investments for moral or social issues important to you and the limited ability to find the best investment vehicles (place to get the highest potential return).
2nd Problem: No personal relevance.
When you simply select funds from a plan at work, there is no personal meaning or connection to your life. You are handing your money over to someone else who does not know you or anything about your situation. Your faith is in the hands of a money manager or team of managers and fully out of your control. Why do you think so many people stop contributing to a 401(k) when the markets are going down? If instead your investments had relevance to your life and were in full alignment with your faith, values, belief, and mission in life don’t you think you would continue investing?
3rd Problem: High Fees.
Most retirement plan fees are hidden beneath layers and layers of costs assumed by mutual funds. There are the widely publicized expenses reflected in the prospectus of the mutual fund listed under the expense ratio. But there are also broker fees, trading costs, commissions, and other fees that you can find only in what is called the Statement of Additional Information (SAI). These additional expenses are difficult to determine, but a 2007 analysis by Virginia Tech, the University of Virginia, and Boston College revealed that the average SAI charge is 1.44 percent per year. This is in addition to the 1.56 percent charged by the average Annual Expense Ratio. In other words, the total charge of the average mutual fund is 3.00 percent per year.
4th Problem: Ticking Tax Time Bomb.
Make no mistake about it. The government knows how to generate future tax revenue at your expense. They do this by allowing you to take tax breaks today in exchange for much larger tax bills in the future. Many people just look at the tax benefits of tax deferral and neglect to factor in that what used to be a $5,000 tax write-off is now a tax bill for tens or even hundreds of thousands of dollars. Uncle Sam is no fool. He’s figured out how to entice you into funding his future spending.
5th Problem: Lack of Liquidity and Accessibility.
If you need access to your funds prior to age 59 1/2, your retirement plan generally will have a 10% penalty and you may also owe federal and state taxes. Often a withdrawal from a retirement account can cost you 40% of more. That means every $10,000 would lose $4,000 in taxes and penalties…that’s not what you can easily accessible. Of course there are exceptions to the rule, but in most cases, your retirement plan at work is very inflexible and costly if you need to access the funds.