Updated: Jul 4
Written by Brandon Nieves
senior managing director
How did a little unknown tax code become America’s go to program for retirement income? It happened quite by accident. The 401K originated as a bonus to supplement pension plans, and eventually evolved into a plan approved by the IRS to defer tax on income and earnings until retirement. However, the 401K was never intended to replace a pension plan or to be the sole vehicle for retirement, but that is what it has turned out to be.
In most cases, the 401K has replaced pension plans as an employee benefit. A pension plan was a Defined Benefit Plan that guaranteed a lifetime income to the employee when he or she retires, and it was backed by their employer. The 401K plan is a Defined Contribution Plan where the risk has shifted to the employee to produce a retirement income based on their contribution and their ability to invest money wisely, and there are no guarantees. In fact, there are risks why the 401k is not a safe way to generate income. It is why so many economists, analysts, mathematicians and Time magazine have called the 401K a failure, a financial flop.
The biggest risk is the market. During the last 86 years there have been 66 positive years in the S&P 500 index and 20 negative years. Although, there are more positive than negative years, if one of those negative years happens when the employee retires it could be devastating to their 401K account. In addition, even in the good year how does the employee navigate the market when it is not their expertise and when even professionals have difficultly timing and navigating the markets. The other risk is that when the 401K funds are withdrawn, after 59 1/2 years old, those funds will be taxed and there is a mountain of evidence that would suggest tax rates are much more likely to increase in the future, which will decrease the funds needed to support the employee retirement.
In summary, the 401K is always at risk because it is subject to market ups and downs and government regulations and the tax code. At W.H. Steiner, we have an option for employees that is risk free. The employee can participate in the upside of the market and never experience the downside. It can provide a retirement income that can be withdrawn tax-free, and it can be withdrawn at any time. In addition, it has living benefits in case of serious illness and provides a legacy for the family tax free upon the death of the employee. What we do is take the “risk “out of your retirement savings plan and add “safety with market protection insurance."
If you are wanting to learn more, request a call with Brandon Nieves.