A key part of that legislation was to move employees away from defined benefit pension plans, which provide a fixed payout for employees at retirement, and toward k plans. The goal of this act was to keep existing pension plans from folding, in part by pushing people into ks.
Because the Pension Protection Act of allowed companies to automatically enroll their employees into k plans, it further facilitated their rise.
Large employers benefited dramatically from these new laws, because k plans are substantially less expensive to fund than pensions. For the most part, this is healthy for our nation, because we should all want to take responsibility for our own retirement. Is this how you want to prepare for your financial future? Are ks a scam?
In many ways, the answer is yes. There are 12 reasons that I believe the k to be more of a myth than a masterplan. I mean, what about the employer match? Do you really think that your company is giving you free money?
Where else in your life do you get things for free? The employer match is simply a reallocation of your existing compensation package and what the company can afford to pay you based on your skill-set. Because, the average length of employment is now only 4.
A vesting schedule means that an employer may require a certain number of years of service before its matching contributions belong to the employee. Depending on your k plan terms and whether it has a vesting schedule, your employer may be able to recover some or all of its matching contributions.
In short, it will take back money from you if you leave your job too soon. Another problem that I have with k plans is that they restrict you to extremely limited investment options. The closest you could come to investing in real estate with k funds would be to roll your plan into an IRA and then use the proceeds. It is also difficult to use a k to directly invest in private placements , initial public offerings IPOs , and other investment vehicles that could potentially pay you higher returns.
A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on the open market.
The vast majority of k plans also prevent individuals from directly investing in precious medals, such as purchasing gold or silver bullion or coins. Ask yourself, is that what you want for your finances? A key difference between pension plans and ks is that because pension plans pool money from a large number of contributors, they control vast amounts of capital.
Historically, this has made them powerful institutional investors , a term that means they get to access investment vehicles with better terms and lower commissions. It also means they have the bulk to invest in commercial real estate , a historically high performing asset class that is difficult for the average person to access and layered with compelling tax advantages. No preferential terms or real estate for you!
Unfortunately, these are all paper assets and not hard assets. Hard assets contain actual value in the nature of the item itself, which paper assets do not. Can you guess which one tends to do be more stable during economic recessions and downturns?
Think about it this way: If there was a major recession in America and you were struggling to feed your family, would you rather own a dozen chickens and an apple orchard? Or, would you prefer to own a piece of paper saying that you had the right to a dozen chickens and an apple orchard?
Be honest with yourself, which one of the situations would have greater inherent risk, particularly during an economic downturn? Retirement Planning. Your Privacy Rights.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Retirement Planning K. Table of Contents Expand. Dollar-Cost Averaging. Long Investment Time Horizons. Lackluster Recordkeeping. Sub-Par Investment Plan Designs. Complex Tax Implications.
The Bottom Line. Key Takeaways While k plans are a valuable part of retirement planning for most U. The value of k plans is based on the concept of dollar-cost averaging, but that's not always a reliable theory. Many k plans are expensive because of high administrative and record-keeping costs.
Kirk Chisholm, Wealth Manager at Innovative Advisory Group , Lexington, Mass One frequently overlooked option for an investor who has a poor selection of fund choices is to speak to your employer.
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Related Articles. Retirement Planning k vs. Partner Links. Related Terms Retirement Contribution Definition A retirement contribution is a payment into a retirement plan, either pretax or after tax. How Does a Pension Plan Work? A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. What is a k Plan? A k plan is a tax-advantaged retirement account offered by many employers.
There are two basic types—traditional and Roth. Defined-Contribution Plan A defined-contribution plan is a retirement plan in which employees contribute part of their paychecks to an account intended to fund their retirements. Besides paying income taxes on the money coming out of your retirement plan, depending on how much you withdraw each year, you also could end up paying more taxes on your Social Security benefits.
If you are like many retirees, you may not realize that distributions from your retirement plans with the exception of a Roth IRA count against you when you calculate how much of your Social Security is subject to tax. So you pay tax on your retirement plan distribution, and then you pay tax again on more of your Social Security income. If you want your spouse to be financially secure and your solution is to leave behind a big IRA or k , think again.
You have a silent partner in your k , and his name is Uncle Sam. You should sit down with your tax planner not your tax preparer every year to identify strategic ways to exit out of these accounts.
Well, a tax planner educates you on ways to reduce your taxes now and in the future, while a tax preparer just calculates your tax bill and sends it off to the IRS. Or you could move it into a specially designed life insurance plan that works very similarly to a Roth. And be prepared to make some moves as you transition toward retirement.
Michael's vision is to help American retirees "re-think" how they manage their financial portfolios during their retirement years. His focus is to help retirees enjoy financial security in any economy, something that he believes is sorely lacking in today's financial world.
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