The Writers Coin

Robert Kiyosaki is at it again. In his latest article, he calls the 401(k) the biggest scam ever. I’ve written about 401(k)s, so I know a thing or two about them and I have to say that RK is talking out of his ass again.

Kiyosaki thinks the world is about to end, and it’s got nothing to do with war or global warming. It’s all due to the evil 401(k):

…the flaws of this retirement plan will grow into personal tragedies as the first of approximately 75 million baby boomers retire, leading to the biggest stock market crash in history.

Then he conveniently picks a time frame in which the stock market did terrible (1998–2008) to show that a sample 401(k) would’ve gone from $47k to $45k. But 10 years is way too short of a time period, especially when you’re talking about retirement. I mean, long-term investing might fall into the 10-year spectrum, but not retirement investing. And he conveniently fails to point out that employer matching kept that number higher than it should be.

He says that retirees will be taking their money out of these plans, causing the values of those funds to plummet. But he doesn’t take into account that the rules for 401(k)s have changed: employees are automatically being enrolled in these plans, which means the amount of money going into them will increase. Will they offset themselves? I don’t know, but he never mentions that.

Vintage Kiyosaki

I don’t know what happened to Kiyosaki or why he says what he says, but he says outlandish things for the sake of being outlandish. He has tons of people talking about him right now (some good, some bad), including myself. So he’s doing something right if his goal is to promote himself, which is something he’s really good at.

It’s like he’s trying to remind people that the guy that wrote a best seller a LONG time ago is still alive and kicking—which is kind of sad.

I do have to say one good thing about him: I have to give him credit for starting me on the path of financial responsibility. If it wasn’t for him and his book, Rich Dad, Poor Dad, I wouldn’t have found The Simple Dollar and would never have started this site.

But after his book became a worldwide phenomenon, he’s taken to these wild assertions that are meant to do one thing: shine the spotlight on himself.

What are Your Alternatives, Robert?

Back to his latest article on the 401(k) issue.

He tears 401(k)s a new one, but he doesn’t propose an alternative. Let’s say he’s right and the 401(k) is the biggest scam in the world. Great, we’re all on the same page.

Now what? How are you supposed to build enough wealth to retire? What other way is there to realistically save money and have it compound over time?

He never gives one, and that’s why he pisses me off so much. It’s really easy to point out things that don’t work (I’m a master at it!), but proposing an alternative that will actually work is much harder.

And that is why Kiyosaki is nothing more than a rabble rouse: he stirs the pot and sits back to watch the havoc he’s caused. And the only reason why anyone gives a damn is because he once wrote a book that became a worldwide phenomenon.  Apparently, that’s an automatic pass to say and do whatever you want without being held accountable.

I better get writing.

Trent had a reader ask him a question that got me thinking quite a bit the other day. Basically, Wayward wants to know if it’s OK to stop contributing to his 401(k) and if he should put the money he was previously putting into it into a different account.

The problem? His company, as are many others during these difficult times, is no longer offering their employees any matching. That means you’re not getting the biggest perk of all of a 401(k): free money.

Matching? We Don’t Need No Stinkin’ Matching!

Umm, yes you do. As frequent readers know, I’m not a big fan of 401(k) providers—I think most of them suck. Why? Let me count the ways:

• Limited Options: Their menu is very limited and if you want to lobby for change, it will take a long time to get it done—if it happens at all. Think of as being in jail and complaining about the food—what are you gonna do but eat what they serve you?
• High Expenses: Why wouldn’t they charge you more? They’re the only game in town, so they can charge whatever they want because they know you want to get your hands on that “free money.” It’s kind of like the ridiculous prices of candy and soda at the movies. There’s no competition so they can charge whatever they want.

Something about that whole attitude of “hey, we’ve got you where we want you so we’re gonna fleece you” just doesn’t sit well with me. So if I were in Wayward’s shoes, here’s what I would do:

• Open a Roth IRA: Trent also recommended going this route, and I think it’s a no-brainer. Having a Roth IRA and a 401(k) gives you added flexibility (as this “oh so early” post of mine illustrates—I’ve come a long way) when it comes time to retire. I have mine in several places, but the best place to start is Vanguard: cheap index funds baby.
• Stop contributing as much: Wayward was originally contributing 20% of his paycheck to his 401(k), to which I say “Whoa!” That’s great that you can afford to set aside that much of your paycheck, but with the matching gone, I would seriously cut this back. How much? How about trying to fully fund the Roth you just opened. That’s $5,000 a year. If you can fully fund it and leave the rest in your 401(k), you are home free.
• Check your allocation: Now that you have a Roth, look at the funds you want to own in your entire retirement portfolio and see where they are cheapest. If you you can get the same fund in your Roth and your 401(k), odds are it’ll be cheaper over at Vanguard than with your 401(k) provider, so pick the one that is ripping you off “the least” and buy that one with in your 401(k). What you’re trying to do here is minimize your fees.

Am I missing any other tips for people in this situation? I know that the drumbeat out there is to contribute as much as you can to your 401(k), but under certain circumstances it’s worth considering the other options that are out there.

Oh and if you still get matching I would still push for opening the Roth—flexibility is a beautiful thing.

I’ve been hearing this a lot lately: lots and lots of people who are close to retiring are suffering a lot of anxiety because of the recent downturn in the market. I’m no financial expert (although I play one on this blog), but even I know that if you’re even remotely close to retiring, you want to have the majority of your investments in “safe” places like bonds or even cash.

How did this happen? Isn’t this a basic tenet of asset allocation? As you get older you can’t ride out the ups and downs of the stock market as much, so you need to be in safer, more conservative investments.

As far as I can see, there are only two possible answers:

• Greed: When the stock market does well, people pile into stocks. After the bottom hit in 2002, people stayed away (as they will now) from stocks. But since the housing/market boom that has been going on ever since, more and more people have seen others getting “rich” and decided they too wanted a piece of the action. 
  Which, OK, I understand. But the problem now is that these very same people are shuffling their money into bonds because they feel like they’ve made a big mistake. Well, it’s too late to fix it by switching to bonds. In order to have a decent retirement, now they should stay in stocks and see what kind of bounce that money can make. That’s where the next bullet comes in. 
• Stupid: Not to be harsh, but being irresponsible (or greedy) with the money you’re relying on once you don’t work anymore is not smart. Sure, I can say this now with the market crashing left and right because I’m 27 years old—I’m not directly impacted by this quite yet. But still, how did people get to this point? That’s why I think those one-stop retirement funds are so great. You buy into it and it will re- balance itself the closer you get to retirement. All automatically. Boring? Sure. Safe and sound? You bet.

The crazy part of all this is that we’ve seen it all before and will see it all again. It’s just another reason why it pays off to know your history. 

If you know someone who is nearing retirement and went through this kind of thing, I’m curious to hear what you think and what you would say to them to a) help them out and b) give them “good” advice.

Or How a Routine is Helpful

As a part of my continual effort to educate myself more and more on all things finance-related, I do a daily read of certain sites: Yahoo Finance, MSN Money, USA Today Money and some other random ones. Sometimes I’ll go to a company’s Yahoo! stock ticker and see what stories they have listed. Sometimes they’re related specifically to the company and sometimes they aren’t. I think I was looking at Bank of America’s (BAC) news feed when I saw a story link titled “The Worst Investment I’ve Ever Seen” by the bombastic folks over at The Motley Fool. The article is about an index fund that tracks the S&P 500 but charges a ridiculous amount for it compared to what Vanguard (or any other index fund) would charge.

It is the rare case where the title of the article isn’t exaggerating. It got me thinking about the battle with my old 401(k) provider. So I decided to check up on my current 401(k) account just to see how it was doing (I do this way too much as it is). I was very careful when I picked my investments but I wanted to see if there was anything else I should be doing and to see if I was doing well or not.

What I Found

My 401(k) portfolio is made up of three parts: an international index fund, a large-cap index fund, and what I thought was a mid-cap index fund. But when I logged on I noticed that my mid-cap fund wasn’t really an index fund and the expenses I was paying on it were horrific. How did this happen? I did a little research and it turns out that we just don’t have any other options in our plan if I want to have a mid-cap or small cap fund in my portfolio. Which sucks. I didn’t have a good feeling about it but decided to email the finance department either way.

Here’s What Happened

After going back and forth two or three times and doing a little more research, I got an email back saying that I was right: there weren’t adequate mid/small cap options in our plan and that the whole menu of options was going to be reevaluated (and the fund I recommended (Spartan Extended Index Fund (FSEVX))) would probably be included after the overhaul. They even apologized for it taking so long!

I had to walk over there to thank them and tell them the story of how the Principal yelled at me at my old job.

Anyway, in the near future I hope to be paying a 0.07% ratio instead of the outrageous 1.44% I’m paying right now. I know some people will scoff and tell me to get out of that investment now, but it gives me the exposure I want and now I know it’ll be replaced soon so I’m OK with it. Over 30 years, however, that would seriously eat at my investment.

While it isn’t the best idea to be obsessive about your investments, it certainly pays off to double check on the decisions you’ve made in the past and to ask questions when you find something is off. I very easily could’ve just assumed no changes could be made to our plan but then I would’ve been stuff paying awful expense ratios. Instead I took action and it paid off (or will pay off). Be proactive!

I’m curious what other people’s experiences have been with their 401(k) provider…