Saturday, May 1, 2010

The Great 401(K) Scam

"The 401(k) will turn out to be the greatest systemic financial hoax ever perpetrated on an unsuspecting public."

- William Wollman, The Great 401(k) Hoax

Like most people I was told to plow as much money into my 401k pension plan as possible. So like millions of other workers out there, I did as I was told. By 2003 I had accumulated a nice little nest egg...that I couldn't touch. Then one day I was in a bookstore and I happened across a book called The Coming Generational Storm. What I read about 401k's that day made me immediately stop all contributions.

Since then I came to realize that the 401k model is hopelessly flawed and will lead an entire generation to despair. Author Laurence J. Kotlikoff made two points that were simply too logical for me to ignore:

1) 401k money is tax-deferred, not tax-free. Therefore, by putting money into a 401k and getting the tax break now, you are making a bet that taxes will not be significantly higher a couple decades from now when you retire.

Will taxes be significantly higher when you retire? Unless the federal government simply defaults on its Social Security and Medicare promises then taxes will have to be raised significantly. Even if they aren't, 401k's are a very questionable investment for the lower and middle class.
The lifetime tax increase and spending reduction experienced by low and moderate income
households from participating fully in 401(k) and similar tax-deferred vehicles arises for three main reasons. First, withdrawals of tax-deferred balances push households into higher tax brackets in old age. Second, contributions to tax-deferred retirement accounts lowers one's tax brackets when young and, consequently, the size of the tax break from itemizing mortgage interest and other deductions. Third, and most importantly, withdrawals of tax-deferred balances when old can trigger much higher levels of Social Security benefit taxation under the federal income tax.
As can be verified in Table 12, for a young couple with $50,000 in initial annual earnings that earns a 6 percent real return, partaking fully in the typical 401(k) plan raises lifetime tax payments by 1.1 percent and lowers lifetime expenditures by 0.4 percent. The lifetime tax hike is 6.4 percent and the lifetime spending reduction is 1.7 percent for such households if they receive an 8 percent real rate of return. These figures rise to 7.3 percent and 2.3 percent, respectively, if taxes are increased by 20 percent when the couple retires.
Kotlikoff then goes on to elaborate that couples making $300K a year get a larger tax break (as opposed to middle-income earners) from participating in a 401k. This disparity is a legacy from the Reagan's Administration, where they cut progressive income taxes, while raising regressive payroll taxes.

2) All of those Baby-Boomers are expecting to use those stocks and bonds to fund their retirement. To put it another way, starting next year and increasing every year after that for more than a decade, the number of people who were buying stocks and bonds are increasingly going to be selling those stocks and bonds (the WSJ estimate $300 Billion a year, every year).

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  1. I got out of 401K's long time ago. Buy gold and silver, you pay NO taxes what so ever when you sell it.

    Or? Invest in the artificially highly manipulated stock market and if you are lucky, and it doesn't crash and you actually make some $$? You pay capital gains taxes.

    Hard gold and silver, buy it now or you will be crying foul!


  3. I never believed the 401k lie in the first place, I started buying Gold and Silver in 1985 and have not stopped since. Also keep your change, just toss it all in a bucket, if the paper currency is revalued it is possible that coin will stay as a fractional value of the new currency. So if a ten to one exchange happens it is possible that coin will gain 10 times its value simply by keeping your change, it is very difficult to coin money and the PTB figure most people dont have that much chaNGE AND WILL HAPPILY TURN IT IN WHEN THE TIME COMES. Oop on the capitals. What do you all think.

  4. I think change makes damn good shrapnel for an old fashioned blunderbuss.

  5. Pay the tax on it now and pay 30%. Wait three years and pay 60% + have to deal with the funds being greatly devalued or possibly gone.

  6. you think the inbred hillbilly hick sarah the quitter is saying starve baby starve or drill baby drill and ruin the environment? ya think?

  7. File Personal Bankruptcy.
    Thanks for the suggestion ……Really like your post….!!! Very beneficial information you gave……i must be agree with this Chapter 7 bankruptcy may eliminate most kinds of unsecured debt and Chapter 13 bankruptcy enables individuals with regular income to develop a plan to repay the debt.!!!!!!!!

  8. The 401k is a massive scam no doubt about it. I'm one of the only people at my job who doesn't participate in the 401k scam. My paycheck is larger as a result so I have the money NOW before it looses anymore value.

    I'm amazed that more people don't realize that the funds you put in a 401k are very easy for the government to SEIZE if they wanted to... If you EVER have a tax issue with the IRS, the first thing they'll go after is your 401k funds that you kindly placed right in the IRS's back pocket.

  9. My definition of 401K; it is a scam for the middle class employee whose payroll deduction supports the investments of Wall Street, hence the “upper class”. A method to lead the middle class into believing their hard earned money is building a better retirement future. 401K/401A; is a method to make us believe we are really cash in on money but when tough times arrive you withdraw your funds, IRS takes their share and definitely a penalty because you’ve taken from big brother in Wall Street.

  10. Due the math......take off your blinders...
    Thanks to be my unemployment I’ve had the opportunity to really analyze my 401K or 401Joke as I call it nowadays. If I had save since my 18th birthday an average of 6% with my employer matching 50%, with a yearly salary increase of 3% and had NOT withdrawn any monies - my current retirement savings would be an average balance of $115k. In this assumption my calculated salary TODAY based on the 3% per year increase should be $106k, it is $85K. So as my late farther would say – numbers don’t lie.
    The truth is there’s really no help for the middle-class or what I typically call the “working class”. We work hard to be productive citizens, we work for the rich, we support our government and donate to Wall Street.

  11. I agree with most everything that is being stated here.
    Unfortunately for me, investing is a manditory issue. No option, if you work, the agreed allocation percentage, per the contract agreement, goes into stocks or bonds. A 401k plan.
    I've been monitoring this "retirement investment" for 20 years now. NONE of the fund groups i.e. Index 500, US Growth etc etc have ever performed as claimed or projected by investment brokers. If you track your account closely you can see some very brief moments of growth over the years, but not near enough growth that would allow a person to pay the taxes, and feel financially comfortable.
    As of now, I have a 14% gain over a period of 18 years. That comes to a growth of .0077% per year. That is completely unacceptable. Not much better than a standard savings account in a bank.
    My opinion of all this is leaning very much toward the possibilty that the entire 401k scheme was intentionally designed to collect the collective wealth of the middle class, under a false pretense that if you work very hard you will be financially comfortable when you are aged.
    When have taxes ever gone down substantially for any duration of time???...never, and they never will. All the numbers being calculated on this site about income brackets and taxation at retirement with social security income etc etc are correct. A person will not be financially comfortable at retirement.

    Who is really benefitting from this system?

    If you want YOUR money in your hand, yes you can get it, "lump sum option" you will pay a heavy federal and state tax(depending on which state you live in.) But, ask yourself this question. Why is it so important that you keep YOUR money in that investment system? "They" and I use the word "they" because it's very difficult to pin point and seperate the interests of powerful private corporations from gov't. "They" obviously do not want you to ever take your money out of that system and I say that due to the excessive taxation that takes place when a person does do it. You will be fortunate to get your orginal investment out. The entire concept is based on a person keeping the money "invested" in that system and receive a nice little dividend check each month to live on at retirement.

    Great lengths were taken back in the 70's to sway people to put money into this 401k system. Enormous advertising campaigns, relentless media coverage. An entire economic sector was created for it. Whenever that much effort is being made to "sell" people on an idea, I have to be leary of the intentions.

    I am under the opinion that the entire 401k system was concieved to control the collective wealth of the middle class. To allow certain entities to track and manipulate wealth of the middle class, because the middle class during the peak decades of industrialization in the U.S. could potentially have entirely to much money in thier collective pockets and that makes "certain entities" uneasy. With this 401k system "they" let you believe your actually making money. To give you the false positive of financial security at a time in your life when you will need it most. That type of thinking or "control" is a great motivator to increase a nations production and keep people occupied.

    This is just one aspect of what I see has been taking place.

    Taxes are necessary, we need them for infrastructure and military. But what I'm seeing are systems of control.

  12. Here is one that is a little bit different, but still a reason to avoid the 401k trap. The mighty Boa knows of people, including a specific couple, who were facing foreclosure due to a wife being out of work for over a year and the husband being forced to take 3 weeks of work off without pay, in the middle of the economic downturn. Wells Fargo refused to even make any attempt to work with them. Wouldn't even grant them to postpone a month, whatever. So then, when the foreclosure was coming, they attempted to get funds from their 401k. They needed to provide documentation. Wells Fargo absolutely REFUSED to provide it. This is supposed to be a legitimate reason to take money out and they were denied. Congressmen, lawyers, judges...all said "too bad" and they had the house stolen by wells fargo. We're talking like a 100,000 dollar house, now worth about 40,000. So, don't believe the "mortage companies" don't want your home" bs. Also, there must be, and even more coming, cases like this and thousands are going to be in for a big, big surprise. Don't put money in a 401k.....

  13. Agreed!!! 401ks are a BIG FAT SCAM that only benefit the government and Wall Street. And then of course the banks because since your money is locked up, you are forced to borrow from a commercial bank and pay them interest.

    So what IF you could, BECOME YOUR OWN BANKER?
    you better research it cause you are missing out bugtime!!!


  15. I totally agree on this. I never believe in 401k at all. Like the author, I was told to contribute more money in 401k, but I refuse. I instead invested in stocks myself. Even though I lost money, but I learned a lot from it.

  16. They lure you in by having your company automatically match up to a certain percentage (what, 3 to 6 percent?), making you think that you're getting free money. But they tell you not to take out the money early or else you'll have huge penalties (and you will!). THEN, if the stocks or whatever your 401k investment is held up and you make it to the right age, you can finally use that as your income. It's shady, really. I got out over a year ago from my 401k and haven't regretted it since, especially given that all the big (bailed-out) banks are controlling your 401k anyway.

  17. One thing everyone should consider is the rate of inflation. The current rate is at 7%. which means that the money you have today, will be worth half in 10 years, and half of that in 10 more years etc. At the steady rate of inflation, everything will cost double what it is in 10 years! And triple in 30 years. A simple example of this is the price of gas. 30 years ago, the average gas price is $1.30, which at the 7% inflation rate, should equal to 3.90 today.

    So what does this all mean?
    ---- even though your employer might contribute 50% to your 401k, the actual value of your money is only worth 30% of what it was! SO you are basically investing in a guarantee loser. With the predicted rise in tax, you are screwed double time. If you ever needed YOUR money before the maturity date, fines and penalty will be enforce, and the possibility of not getting the 50% contribution promised to you. Oh and one more thing, getting your money out early is subject to income taxes and if you repay the money borrow to avoid charges and penalty, once you retire, you will be charge income tax on that same money again! the list goes on and on!

    sorry about bad grammar or sentence structure etc...
    its late , but I thought people should be more cautious. Its amazing how easy it is for money and power can influence the population.

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  23. 401k pension plan is amazing…… will be looking forward to do some saving with this plan particularly.

  24. Scammers are now targeting the pension schemes and use them to get all of your money by giving you the offer by doubling it which is impossible. Mostly people share their personal information with strangers because they trust them completely. But that is not a good move.
    Be aware of these scammers and never share your document information.


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