Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
I recently listened to the podcast GRE (Get Rich Education with Keith Weinhold) and his guest was Ted Benna, who has been credited to being the father of the 401K. (Here is the link to the episode for any who are interested: https://itunes.apple.com/us/podcast/get-rich-educa...)
In the interview Benna stated that the 401K has veered from what it’s intended purpose was and that the mortgage fund brokers are the ones getting rich through the fees that they charge rather than the actual participant. He shared that it’s benefit has been that it can be a forced savings plan for most people, especially for those who have a hard time saving.
Benna then shared that he is a real estate investor.
I think it is so sad that the majority of people think that the 401K is the way to go for retirement. It is definitely a cultural belief now and, in my opinion, it makes people lazy investors. Ultimately the 401K makes the brokers and managers rich while the investors get what’s left over, if anything. I agree with Benna. I think we should blow it up. What do you think?
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8y
The employer match is both (1) the best return (by far) of any investment in my personal savings portfolio and (2) the easiest investment. Worst case scenario...take the 100% match and then take a hardship withdrawal down the road and pay the 10% penalty. And many of us are in index funds with minuscule fund fees (mine is 0.17%).
San Francisco, CA · Member since 2014 · 345 posts · 281 votes
8y
@Bernard Reisz Bernard - I do see your pricing ($750 per year, $150 annual maintenance) for a solo 401K checkbook plan. Thanks for sharing the link, and I know BP has rules against self-promotion so I understand that you are reluctant to push your services quite so directly.
Your point about operating business costs is fair. Google pays its employees, so if I buy Google stock I don't keep all of their sales revenue, I'm entitled only to a share of the earnings. I think a lot of Bigger Pockets people make money based on doing property improvement and management work themselves. One can't legally do this for an investment with self-directed retirement funds with preferential tax treatment. Investors HAVE to add a layer of operating expenses vs. self-managed property investment.
San Francisco, CA · Member since 2014 · 345 posts · 281 votes
8y
@Steve B. I don’t understand how Tom Steyer or Farallon Capital have anything to do with 401ks, which are defined contribution plans with investments directed by employees. You can’t put your 401k in Farallon even if you want to. 401k plans administered by big brokerages are the best deal going for individual investors.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
8y
@Tom V. I’m not arguing against 401k’s as an investment vehicle. I’m pointing out a major, growing problem with 401k plans, specifically ridiculous and rising “management fees” for a captive financial product. This is Ted Benna’s main point as denoted by the OP
San Francisco, CA · Member since 2014 · 345 posts · 281 votes
8y
I have had 4 401k plans in my career and have always had the option of rolling money into a pre tax IRA, so my money has never been captured.
I would ask to be shown a plan charging higher maintenance or management fees than it was charging 5 years ago. These plans are getting cheaper all the time.
And if fees are a problem, going the self directed route is even worse.
Appraiser · Brooklyn, NY · Member since 2018 · 106 posts · 118 votes
8y
I personally stopped contributing to my 401k when I saw how badly it was performing despite the U.S being in a record bull market. Like I knew for a fact that the funds I was invested in were up because I also hold an S&P 500 Index Fund that I contribute to after-tax and the stock market has been overall up since I entered my company's 401k system. And yet somehow in a historic bull market my 401k was returning -2 to 0.5%. Like what?!
And I dug into it and the only explanation could be the hidden fees which my company and the 401k provider does a terrible job of explaining. The language is deliberately convoluted and tedious and to get the most specific information about fees I was told point blank that I had to call the 401k company.
That to me, is ridiculous. And by the way it's not like employers are just giving away money with a 401k match. It's coming out of the money they would otherwise be able to pay you in your salary.
The whole thing seems like a sham. The data is already coming out about what 401ks are doing. More people are declaring bankruptcy in retirement than ever before and this is only the beginning. I highly recommend Andy Tanner's book 401kaos for a more detailed explanation of what's happening.
For now I choose to save after-tax money to deploy into real estate and other investments where I am an active participant. I realize not everyone is in my position to study investing in depth and take the steps I am taking, but I do not have much faith in the government solving the problem on a systemic level so I am taking control on the micro level of the one thing I can control which is myself. I'm young enough to figure things out and build a long career out of investing. I really do worry about my parents' retirement and I want to make sure I am able to help them out when the time comes if I have to. :/
Investor · Corona, CA · Member since 2014 · 746 posts · 372 votes
8y
I've always participated in a 401k through work. They've helped buy my first property I lived in which we now use as a rental. Get me through 1 maternity leave, a 3 month period when we moved to California and didn't have a job at first. And now will help fund a down payment on a 3 family rental.
I've never thought of it as a retirement vehicle as I don't plan on working for anyone for the next 35 years. Only as a savings account to use to put towards real estate investments when the time is right.
Lindenhurst, NY · Member since 2017 · 75 posts · 35 votes
8y
I'm interested in learning more about self directed IRA's because I think the fees associated with my retirement accounts and the lagging performance despite a booming market are sad as @Jacqueline Carrington noted. As far as I know, one great difference is the power of leverage. Real estate allows that. 401k's do not. Investing the money, with the management fees and all in real estate is tax deductible. 401k fees are not.
San Francisco, CA · Member since 2014 · 345 posts · 281 votes
8y
@Josane Cumandala What did you hold in your 401K account that produced such meager returns? Who was the plan sponsor? The 401K account itself is not an investment. It is a kind of account (as in, a checking account, a savings account, a 401K account).
Were you prohibited from moving your funds to a standard IRA where you could choose any listed equity product?
Was you employer matching any of your contributions? I have never seen an employer offer an employee either to match contributions or pay the employee more. It isn't as if employees get to choose in my experience.
Investor · Smithfield, VA · Member since 2016 · 25 posts · 9 votes
8y
Overall, the 401k Is a good thIng but like most thIngs I lIfe there are +/-.
Because there are a 401k with company match, some that offer brokerage accounts for more flexibility, sometImes good optIons to pick from (like low cost index funds, tax advantages, and even tge ability to take a loan (to purchase real estate!), I believe the positives far outweigh the negatives.
most people do a very poor job at planning for retirement so a vehicle that helps people get there, even if there are definate disadvantages like fees, is a better option than not planning for retirement at all.
Or at the end of the day, diversify and use all the financial tools at your disposal.
Rental Property Investor · Brooklyn NY · Member since 2018 · 263 posts · 469 votes
8y
One should choose a asset allocation, pick low-cost index funds, stay the course and ignore the noise. A employee benefit plan is a tool to do just that. And that is truly passive.
Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
8y
@Jacqueline Carrington , did you end up paying any penalties at all when you used those 401k funds for those purposes? I do think 401ks do motivate people to save money , especially with the employer match that they otherwise wouldn't.
Investor · Tacoma, WA · Member since 2017 · 19 posts · 24 votes
8y
Currently the national debt to GDP level is the highest it’s been since WW2, which likely points to increased taxes (much higher than todays levels) and manufactured inflation in the future.
This should definitely be considered when deciding how much to allocate( OR DEPEND ON) to a 401k, I look at mine as a backup plan In case im not able to create enough income to retire through RE or other investments.
For my situation it makes sense to pay the taxes now and invest in tax friendly RE. This is partly due to my employers plan and ineligibility for a Roth IRA.
@Steve B. You don’t appear to understand some basic distinctions between employer managed pension funds and employee-selected 401k funds.
Guys like Bernard email you documents and wish you luck in running your plan.
I've been enjoying the give-and-take on the forum - and this comment does require a response. Generalizing - to infer or form a general principle, opinion, conclusion, etc. from only a few facts, examples, or the like - is not helpful. You did not work with me so such comments are a disservice, not only to myself, but to anybody else on the forum that reads them.
A helpful comment would point out to forum members the kind of questions they should address before committing to work with a service provider in this space.
It is important to outline what the service is - and what it is not - so that expectations are aligned with the offering. It is not an investment service. Investments can be accessed in multiple ways. Many clients are direct real estate investors that identify their own deals and leverage their network and skills to maximize their accounts. Others participate in the alternative markets by investing in private placements and syndications, thereby leveraging the networks and skills of others to passively maximize their accounts.
What is the service? It is a service that enables an investor to compliantly invest tax-advantaged funds in alternative asset classes, effectively and efficiently.
That definition is a very high-level outline and, to be honest, rather nebulous. A nebulous definition does allow for differing service levels among providers. However, the various service providers do havevery different capabilities and business models. Please don't generalize.
Brookfield, WI · Member since 2016 · 191 posts · 108 votes
8y
"especially because most employers offer awful 401k fund options. Usually, they are high-fee and have a ton of hidden fees attached with them. I lay the fault on the misguided HR departments." I think this general assumption is flawed and not backed by any real data, these are more likely the exception, not the norm. Every place I have worked(over 20+ years) has been through a big financial house like Fidelity (for example) which has many low cost options. (I am in an index fund at 0.3%) and a few other funds, that even with fee's are returning ~10-12% a year(although this year has been exceptional, approaching 20%). Plus it's optional. Unlike the 12%+ you are forced to contribute to SS for a whopping 0.75% ROI. Don't like the choices, take the tax hit, put your money in a Roth, buy a rental, or classic car and actively "manage" your investment. A 401k/IRA is even MORE autopilot than the very best case scenario of rental with property management. The viewpoint also under states the value of reducing tax burden NOW vs. later. Yes, you pay more in the long run, but would you rather have $5000 right now, or $250 a year for 25 years, starting in 25 years?
@Tom V. I’m not arguing against 401k’s as an investment vehicle. I’m pointing out a major, growing problem with 401k plans, specifically ridiculous and rising “management fees” for a captive financial product.
Rising fees? Where are you getting this info? From what I read fees have been decreasing due to complaints:
Some employers are obviously getting it wrong as that article shows. However, for me personally I'm in a low-cost index fund for my 401k which charges 0.04%. That's $40 for every $100,000 invested, doesn't seem high to me. Most people just need to spend 30 minutes researching funds rather than just randomly picking.
I've also moved jobs and transferred my old 401k to an IRA. With this, I can move it around and take advantage of broker bonuses like those shown at this website:
Let's say I currently have an IRA with $250,000 in low cost fund charging 0.04% (available with S&P500 trackers VOO or IVV). I pay $100 in fees every year but offset it with a $600 bonus for moving to a new broker. I'm actually getting paid $500 for them to hold my investments.
San Francisco, CA · Member since 2014 · 345 posts · 281 votes
8y
“What is the service? It is a service that enables an investor to compliantly invest tax-advantaged funds in alternative asset classes, effectively and efficiently.
That definition is a very high-level outline and, to be honest, rather nebulous. A nebulous definition does allow for differing service levels among providers. However, the various service providers do havevery different capabilities and business models. Please don't generalize.”
That’s rather lofty. I suggest in practice it means your customers pay you $750 and $150 per year and exchange you mail them some apparently irs acceptable plan documents as PDF files and then bear little to no ongoing responsibility for plan compliance or tax law adherence. What else do your fees cover, for customers?
If you are an employee, it is probably a good idea. If you are an entrepreneur or real estate investor, not a good idea. The idea of saving for a specific action is a middle class mentality, nothing wrong, but not an efficient way to become financially free.
The idea is to save to utilize the funds to invest in assets, so those assets pay for your expenses.
Just my opinion, been on both sides, and the 401k free life is superior
Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes
8y
it's interesting to me that so many people think the 401k is still viable. I could see a solo-401k or self-directed IRA being profitable, but by and large the 401k doesn't work anymore, simply because of the sheer numbers of people that are doing it. Large, above average profits are possible in a fund at first, but as a fund gets too big and buys up all the good stock or bonds, naturally the fund becomes either overinvested in one niche, or has to take the excess money and apply it into other stocks that aren't as profitable. Thus, the bigger the fund, or the bigger the amount of money placed in a fund, the faster the fund's returns regress to the norm. Warren Buffett cited this as the reason he closed his investment fund. With Real Estate, the opposite is true, the larger the scale, the bigger the profit potential. Thus, the 401k is dead, as is any stock market fund in general at this point.
Rental Property Investor · Carlsbad, CA · Member since 2013 · 12 posts · 2 votes
8y
I'm going to bring in a little philosophy here and ask doesn't the responsibility fall on the individual knowing thyself(thanks Socrates) and what's best for them?
If they are completely undisciplined financially then yes a 401K it helps them save, If they are more sophisticated and understand real estate investing for example and how it grows your wealth then they can reposition themselves into another investment beyond a 401K like rental properties.
Here's the formula: knowing thyself X your own financial education X your own financial plan = YOUR WEALTH
My point here is that anyone can do well and be wealthy(working toward and achieving their individual financial goals, not society's) based on their ability to figure out how they can use their natural strengths and mitigate their weaknesses, coupled with the vehicle and plan that suits them best. Thank you for letting me share my opinion. Cheers!