401(K) EVOLVED?

What were you doing when the 401k was created? Pulling over to use a pay phone? Using a Randall McNally’s Map or Mapsco for directions? Popped in a cassette tape for music? If it were 1980 when the IRS allowed the first 401k from Ted Benna to be approved, this all would be normal.
If all of that has evolved, pay phones to smartphones, Mapsco with GPS and Google Maps, cassettes with streaming…but what have 401k’s been replaced with?
With all the hype over the 401k, even Ted Benna (the creator of the 401k) says it is a monster he would like to blow up. High fees and volatility put most 401k underperforming expectations. Surely options have grown since the 401k came in the picture…or maybe just 401k fees have grown.
Good thing is, there has always been another option. Bad thing is major financial firms don’t want you to know about it. CVLI or LIRP have been around for over 100 years.

Times have changed since the introduction of the 401k.
• When Section 401(k) was introduced as a part of the 1978 Revenue Act, the top federal joint filing tax rate was 70% for everyone earning over $203,200.¹
• Approximately 25% of earners made between $18,000 – $26,000, which was taxed at around 32%
• 43% of households made over $26,335 annually which put them in at least the 36% tax bracket up to 70%.²

Today federal taxation falls primarily on the wealthy, a vast majority of Americans were paying high federal tax rates. At the time, deferring income tax may have made sense at these higher rates.
• In 1980, the federal debt was approximately $914 Billion, or roughly 34% of GDP.
• Today, our federal debt is approximately $31.7 Trillion or roughly 121% of GDP.³
• in 1980, 60% of employees had a company funded pension plan (defined benefit).
• That number fell to just 10% in 2006 and is even lower today.

Early years of the 401(k), employers matched employee contributions to utilize the early 401(k) tax law provision. Fees were paid by the employer. Ted Benna said, “I’ve documented the history of these and how participants have been impacted, and it’s not a pretty picture,” the man considered to be the father of the 401(k).⁴ “It went from all fees being paid by the employer to everything getting bundled and dumped on the employees.” In fact, Benna feels 401(k) has failed America – and he’s not wrong. The world has evolved around us, yet the only evolution to the 401(k) is that it has become the main vehicle for retirement income. Pensions are all but gone and many experts believe Americans are not prepared for retirement.
The typical 401(k) investor has averaged a 5.19% rate of return annually inside their investment portfolio vs. the S&P 500 Index of 9.85% for twenty years ending 12/31/2015 according to a Dalbar study.⁵
In essence, investment risk has transitioned from organizations and pension plans to the employee deferring compensation into a 401(k) plan for their retirement future. Individual investment returns lag the market, and for many, their 401(k) is stagnant. When was the last time you made a deferral or investment adjustment? To be honest, the whole situation is a mess and yet investors keep doing the same thing over and over, advised by their advisors, CPAs, the financial service industry, the media, etc., that this is the only way to retire with little regard for whether or not it has, or will, lead to a successful retirement.
Now, we’re not suggesting there is only one way to save for retirement, and our strategy isn’t right for every investor. In fact, for most people, the only systematic method for saving for retirement is payroll deduction (i.e. 401(k) contributions) and for those people, please keep doing it. Learn about options like auto increase and consider educating yourself on the advantages of transitioning 401(k) contributions from pre-tax to ROTH. But for those select few that max out their 401(k) deferral, and look for additional saving or investment opportunities, there may be a better way forward that empowers financial freedom in a way most have never considered.

Take control of your financial future
Many believe taxes must go higher in the future to fund our debt and rampant spending. So why in the world would you defer taxes during this historically low tax environment only to pay them when taxes will most likely be higher? When most people retire, nearly all of their tax deductions are gone including kids, mortgage interest, and the 401(k)-income deferral advisors touted as such a great benefit.
In our opinion, much of the traditional advice ignores this fact and encourages us to invest like it’s 1980. In all probability, the idea of lower future taxes is just as big a myth as 401(k)s being the best retirement option for all employees.
A properly structured LIRP (Life Insurance Retirement Plan) however, should be considered as one strategic option for empowering your financial freedom. Not all LIRPs are created equal and there are a lot of other options out there like VUL and IUL being offered. Make sure you understand and educate yourself on the difference in these options as it may make a significant difference in the outcome.
The IUL, for example, promises equity or stock market style returns with no downside risk. Take caution when someone suggests there is NO downside. Also, the nuance in how IULs work requires significant consideration and understanding. IULs can illustrate amazingly well and show great growth, until reality happens. Again, there is a place for IULs as well, but in our opinion, just not as a LIRP. There are insurance providers and advisors that specialize in these strategies, but not all are created equal. You may really like your primary physician; would you trust him to perform heart surgery? Having provided all different levels of caution, the properly structured, max-funded, whole life LIRP utilizing non-direct recognition from a quality provider can be significant!

Here’s why, when properly designed, a LIRP:
• Grows tax-free
• Produces tax-free income
• Doesn’t trigger social security to be taxed
• Delivers liquidity prior to age 59 1/2
• Requires no 1099 reporting
• Allows for warehousing of capital with growth
• Provides significant opportunity to enhance investments
• Enhances ability to accept additional risk in other portfolios

Finally, LIRPs are non-correlated to the stock market. So, while volatility and sequence of return can kill your retirement portfolio or IUL performance, properly structured LIRPs credit a dividend annually. While this too is not a guarantee, quality insurance providers have credited dividends for the last 100+ years.
If so much has changed since the advent of the 401(k), why hasn’t saving for retirement evolved equally? It actually has, you just need to get the right advice.

Footnotes
1 https://www.tax-brackets.org/federaltaxtable/1978
2 https://www2.census.gov/prod2/popscan/p60-121.pdf
3 https://www.usdebtclock.org/index.html
4 https://www.barrons.com/articles/the-inventor-of-the-401-k-thinks-it-has-gone-awry-1542413142
5 https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519