Why 401ks are More Painful than Stepping on a Lego | The Charitable Payraise

William Lloyd
5 min readJul 20, 2022

We are all painfully aware of the appalling lack of retirement-readiness among Americans.

But the painful truth paints even grimmer picture: In even the best corporate 401(k) retirement plans, three out of every four participants won’t have enough money to pay for their post-retirement living expenditures.

Out of millions of retirement accounts managed by Edelman Financial Engines (EFE) for close to 300 publicly traded and privately held companies, ranging from top executives, clerks, and janitors were included in the study that gave us these results.

So your 401(k) probably sucks.

The average fee on a 401(k) retirement plan last year was an exorbitant 0.93% of the assets. The fees in the top 10% of plans were even more shocking: 1.72% of assets. This is significant in a market where most individuals expect annual returns of 6% before costs.

Meanwhile, the average 401(k) provides 15–20 fund options, all of which have greater expense ratios than those available through a brokerage for your IRA. A typical lineup would be: Many actively managed mutual funds, a few passively managed index funds, and very few exchange-traded funds (ETFs).

This should sound familiar to any educated investor. You’re probably aware that you were paying a lot of fees, even if they were never explicitly stated.

The best 401(k) plans offer significant match rates and make it simple to invest automatically. In the best-case scenario, you won’t have to ask your boss how much — or how frequently — you should save. While you receive adequate workplace education, everything is on autopilot.

The worst 401(k)s, on the other hand, will actually reduce your savings. You will make poor choices, but it is not your fault.

So 401(k)s suck, but they’re still the de facto retirement plan for the great majority of Americans. Why?

It all started in the late 1970s, when the IRS established Section 401k. This allowed people to invest pre-tax cash in an account which grows tax-deferred until retirement. The idea was that employees would save money during their working years at a higher tax rate, then access it at a lower tax rate when they retire.

In the 1970s and 1980s, this made perfect sense. The highest marginal tax rates then were around 70%. Nowadays, they are significantly lower, and the tax rate on 401(k) funds may create a scenario in which employees contribute funds at a greater rate than the rate in retirement. This completely negates the purpose of a 401(k).

We’re Living in a 401(k) World — And it Sucks

Back in 2013, Tom Friedman said, “ We now live in a 401(k) world — a world of defined contributions, not defined benefits .” Unfortunately, the 401(k) world isn’t a good one. With 401(k)s as the foundation of the retirement system, we see the following:

  • Poor individuals receive nothing at all.
  • Wealthy individuals who would have had significant savings in any case receive a big tax break with no discernible incentive effect.
  • For those in the middle, the amount of assistance you receive is inversely correlated with the marginal tax rate you pay.
  • Only a small percentage of middle-class individuals successfully complete the necessary paperwork to save the required amount, after which they choose an intelligent low-fee, widely diversified fund as their savings vehicle.
  • The majority of middle-class savers either undersave, overtrade, invest in extremely expensive assets, or do a combination of all three.
  • A tiny group of highly compensated individuals now enjoy rich careers selling subpar investment products to a large middle-class clientele.

Another significant issue with 401(k)s is, according to Forbes magazine, the reported and undisclosed fees total up to 3%. So, before your fund earns even a penny, the market must expand by more than 3%. With a 401(k), you pay that 3% annually as an employee regardless of how the market is performing. According to Time and Forbes, the real increase of 401(k) funds over time has only been roughly 3.5%.

There are a few more common drawbacks of 401(k)s:

  • a tiny or nonexistent company match.
  • excessive charges for the account.
  • few opportunities for your money to be invested.
  • waiting till you’re permitted to maintain employer contributions.
  • trouble accessing money early.
  • ramifications for taxes while withdrawing.

What Can You Do?

If your plan is among the majority of low-quality, high-cost 401(k)s, we recommend the following:

Your contribution should be limited to the amount that your company is willing to match. The value of the match very probably outweighs the high costs and drag caused by poor investing decisions.

  • Don’t contribute the maximum amount just to maximize your income tax deduction. Acting simply to avoid taxes often causes people to make poor choices.
  • If you change jobs, don’t roll your 401(k) into the 401(k) of your new employer unless you’re lucky enough to find one of the few good plans. Instead, take advantage of the opportunity to select a low-fee IRA with low-cost, high-quality investment options.

The good news is that there’s a new way to keep more of your hard-earned money. At The Charitable Payraise, we’ve developed a new system to help retirees close the gap between their cost of living requirements and their cash flow.

How The Charitable Payraise Can Help You Make a Bigger Impact With Your 401(k)

Traditionally, both the individual and the employer contribute pre-tax cash to a 401(k). These funds are invested in various funds and stocks.

The account’s worth grows over time as new deferrals and business match contributions are made, and the value of the investments, including company shares, rises.

These holdings are liquidated, rolled over, reinvested, and dispersed as taxable income upon retirement.

With the ROQS™ Method

As before, the employee and the firm continue to contribute pre-tax cash to the 401K, allowing investments to increase over time.

When an employee retires or severs, a new technique is used:

  • The 401K funds are transferred into a Rollover IRA as usual.
  • Concurrently, the 401K’s Company Stock is transferred to an after-tax Brokerage Account.
  • The Company Stock is then utilized to fund a new LLC co-owned by the retiree and Charity (s)
  • The ‘secret sauce’ is used here! This results in two new vehicles, the LLC and the Roth IRA, that generate tax-free cash flow!

Want to know more? Reach out and we’ll give you a walkthrough.