DID YOU KNOW 401k plans were instituted in 1976 as an add on to companies

Did you know 401k plans were instituted in 1976 as an

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DID YOU KNOW? 401(k) plans were instituted in 1976 as an add-on to companies’ Defined Benefit Plans as a perk for executives. The Defined Benefit Plan, which is virtually extinct in corporations now, provided a specific amount of income per month for life and was the responsibility of the corporation. The 401(k) plan was designed to supplement the limited and fixed income of a Defined Benefit Plan by allowing executives to invest pretax salary dollars with matching funds from the company. The execs could afford to roll the dice on the market with pretax and matched dollars because they had a Defined Benefit Plan providing a safe foundation for their retirement. By 1990, however, 401(k) plans were growing so rapidly with the bull market—most were averaging 15 percent per year— that everyone wanted one. Employees saw the growth in the 401(k)
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plans as an opportunity to get rich. And corporations saw shifting to 401(k)s as an opportunity to get rid of costly Defined Benefit Plans. Of course, with 401(k) plans averaging 0 percent for the last ten years, giving up a defined benefit for a mutual fund crap shoot doesn’t look so smart. Some good news about 401(k) plans: You can borrow your own money. Most employers will allow you to take half or up to $50,000 out of your 401(k) and pay it back plus interest out of your paycheck over five years. But you’re paying yourself back and the interest goes to you. What can you do with the $50,000? You can invest it however you want to. (If you leave that job and go to another employer, you will have to pay back that “loan” quickly or face a large penalty.) Still, the best choice is to force your company and plan administrators to give you full options. You should have the whole range of stocks to choose from in your 401(k). There’s no reason for your employer to tell you what you should and shouldn’t invest in. You can do that with these magic words, “fiduciary responsibility,” as in they have one, and if they don’t give you a reasonable range of choices, then they have violated their fiduciary responsibility and are wide open to some other magic words, “class-action lawsuit.” Not from you, of course. You would never sue your employers whom you love so much. You’re simply letting them know that they’re exposing themselves to an unnecessary lawsuit by only providing mutual funds, all of which can (and just did) go down at once. Let them know that a true fiduciary would give freedom to investors who believe they can invest their retirement money more successfully than the people who run the mutual funds. Remember: fiduciary responsibility, class-action lawsuit. Magic words. Another magic word: “self-directed.” When you ask that your account be self-directed, you are requesting that you— not a fund manager—can choose whichever investments you want and you are not limited to buying only mutual funds .
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Another option that may be available to you: just roll over your 401(k) to an IRA (Individual Retirement Account, see graph) so you can invest it where you want.
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  • Spring '20
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