Today’s 401(k) has become the employer standard for retirement plans, but it originally was conceived to supplement pensions and Social Security. Increasingly, workers are determining they need to examine other products without the risk of 401(k)s to plan for life after retirement.
Thousand Oaks, CA - April 29, 2015 /MM-LC/ —
More people than ever are moving their money into indexed annuities and away from 401Ks as waves of retirees are real-life testing the 401(k)’s ability to provide financial security through retirement.
“There’s a lot of upside to fixed index annuities over a traditional employer 401(k),” says Ronald Grant, The Safer Money Specialist, a Thousand Oaks, Calif.-based company that often recommends its clients leave behind risk products such as stocks, mutual funds and variable annuities. “Namely, when the market goes up, investors have an opportunity to ride that wave, but when the market goes down, you don’t lose. Other clients who are saving for retirement begin to realize that 401(k)s, in addition to risk, are full of fees, and those clients start looking at other products that have neither.”
Grant, who has been licensed since 1996, says many of his clients are seeking three basic things: protection of their principal, a range on return over time and products that are easy to understand. That’s often where a fixed indexed product comes in. Investors in fixed indexed annuities, for example, have access to 10 percent of their money penalty-free each year; they won’t pay fees on it, and they won’t lose their principal or annual gains, which are locked in each year. Moreover, Grant says, if the plan is set up properly, it can provide income for retirement that cannot be outlived.
Along with a number of fees, another major criticism of the 401(k) is the inability to access the money without financial penalty until the so-called 59 ½ rule has been met. Under a 401(k), once a person reaches age 59 ½, he or she can withdraw from the 401(k) without paying a 10 percent federal penalty tax. With an indexed product, 10 percent of the money is accessible annually without a fee also at 59 ½.
“Billions of dollars each year are going into FIAs,” Grant says. “It’s the right thing to do for some people who don’t want to gamble with high-risk products. Why would I want my dignity money – my retirement savings – in a product where I could lose it all and be forced to go live with my kids in retirement? In poker, we don’t go `all in’ with our home, our car, and our kids’ college fund. Why would we do that with our retirement savings?”
The section of the Internal Revenue Code that made 401(k) plans possible was enacted into law in 1978, with the first employer 401(k) plans established in the 1980s. It was created as a savings plan and tax shelter, but not originally intended as the retirement standalone that it is today. After many employers found 401(k)s were cheaper to fund than pensions, more began to freeze pensions and offer 401(k)s, which were intended to supplement Social Security and pensions. In short, they were to be one leg of what some financial experts like Grant call a three-legged stool.
After the financial devastation of 2008 many investors saw their savings dwindle, and many older workers are now facing the reality of being forced to work into retirement to make ends meet. According to an Employee Benefit Research's Institute analysis, retirement account losses in 2008 disproportionately affected wealthy savers, with those with more than $200,000 invested losing on average more than a quarter of their savings. Investors in the $100,000-$200,000 range lost 21 percent on average and the typical account with $50,000 to $100,000 lost 15 percent, the institute said. The nation's largest retirement-plan administrator, Fidelity, says the average balance in its customers' accounts dropped $19,000 in 2008. Grant and the majority of his clients in indexed annuities didn’t make financial gains in 2008, but they didn’t suffer devastating losses.
“Clients got to zero. And zero is always better than a loss,” Grant says.
Some financial experts now say that the real winners in the growth of the 401(k)have been the mutual funds, with their myriad of fees, that either were not clear or not transparent to the millions of employeeinvestors, who often are financial novices. Such fees might include legal fees, trustee fees, transaction fees, stewardship fees, bookkeeping fees, finders’ fees and more.
“With a fixed index annuity, as long as you don’t break the contract early or take more than 10 percent, you’ll never pay a fee,” says, Grant, who’s 63 and has his money in indexed annuities.
The Safer Money Specialist says that even with indexed annuities, the final decision for a client is always based on a client’s specific financial scenario, rather an across-the-board recommendation.
“It is policy never to tell clients what to buy,” Grant says. “They are given some information and insight, and it’s their choice on what they want to do.”
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Name: Ronald Grant
Organization: Safer Money Specialist
Release ID: 80846