Do not let your 401K scam you! Take these steps to avoid the 401k scam from Fidelity and others so you can reach your retirement goals. The idea you could stop working if you diligently put money into your 401K is not accurate. It is only accurate if you put your money in the right places. Otherwise, your 401k may be getting scammed, and you are not going to retire comfortably. Unfortunately, most people do not put their money in the right places because most people are getting scammed by the 401K institution.
The idea you could stop working if you diligently put money into your 401K is not accurate. It is only accurate if you put your money in the right places. Otherwise, your 401k may be getting scammed, and you are not going to retire comfortably. Unfortunately, most people do not put their money in the right places because most people are getting scammed by the 401K institution.
Whose 401K is getting scammed? Probably yours
The individuals who are getting scammed are not stupid, elderly or the uneducated. They are intelligent, well-educated folks getting scammed by a sophisticated web of lies manipulating us every step of the way. Brilliant, data-driven people are getting scammed. 401K was scamming me until a few years ago. Do not let your 401K scam you! Now, let’s learn to avoid the scam.
Is the concept of a 401K a scam? Maybe
“Always max out your 401K!” vs. “401K is a scam!” Which side is telling the truth? In theory, 401K is a way to help you invest your money for retirement. But the “help” is not on your side. When it comes to your retirement, your employer is not on your side, the 401K financial institutions like Fidelity are not on your side, and the thousands of actively managed mutual funds are not on your side. They are all out to take your retirement money away for their profits.
Let’s walk through an example of a 401K scam
Veronica works at a company: ABC Incorporated. She gets paid $80,000, and she has elected to contribute 20% of our pre-tax paycheck to 401K. She’s happy to note that her firm does a 3% match to her 401K contribution; that is $480 of free money if she maxes out her 401K. Sounds great so far, but the scam starts here.
Scam Step 1: ABC Incorporated elects to work with a money management company to manage all of its employees’ 401K.
Veronica’s 401K will get direct deposited into a designated money management company, like Fidelity, and nowhere else. If Veronica thinks Vanguard is a better provider, she cannot go with Vanguard as long as Veronica works at ABC Incorporated. Until Veronica leaves ABC Incorporated, she must put her 401K money with ABC’s chosen 401K partner.
What if ABC Incorporated decides to partner with a small money management company to invest their employees’ 401K? Like this one? Small 401K management companies often offer employees a very limited selection of mutual funds. Chances are none of the already limited options are index funds and all of which have high fees. This is an example of a total scam. Veronica is better off taking her money to an IRA or Roth IRA with Vanguard if this happens. She will not be able to get the employer match ($480), but big deal. Plus, she will avoid putting her money in a place that charges her fees and doesn’t grow.
It’s possible that ABC Incorporated receives $$$ from these small money management companies for picking them as the 401K provider. The $$$ could be attractive enough where your company is knowingly committing your 401K money (and your entire future) into a terrible trap of lies.
Scam Step 2: Advisory service and a “restricted” list of 401K options.
Let’s say ABC Incorporated partners with Fidelity. Veronica creates an account on Fidelity and starts to choose where to invest. She sees a myriad of links related to sign up for portfolio advisory services and gets a lot of calls from Fidelity asking her to pay more to hire a financial advisor. She is confused on whether she should spend that money. Furthermore, Veronica sees that the list of 20 funds ranges from small cap to large cap, from emerging markets to the “Freedom Funds,” a list that might look like the one below. Two scams exist here, can you find them?
First, the financial advisory service is a fraud and a waste of money. These services are high margin revenue sources for Fidelity and do not benefit Veronica. Financial advisors often try to sell Veronica products that maximize the profit of Fidelity, not the long-term profitability of Veronica’s retirement account. As such, financial advisors almost always try to convince hard-working Americans to steer away from low-cost index funds and buy into high-cost actively managed funds. This is a conflict of interest issue that should be illegal, but it is not.
Second, Veronica is confused about her 401K options. She has read a lot of articles and knew that she should invest in index funds, but she doesn’t see index funds listed in the 20 or so funds to invest on her firm’s 401K page with Fidelity. Or, she only sees 1. Oh well, Veronica assumes she has no other choice and proceeds to pick funds to the best of her abilities. Ladies and gentlemen, this is another example of a total scam.
The “recommended” funds (aka the scam) for your 401K
Fidelity has 462 funds in 2016. Its largest fund is an index fund called Fidelity 500 Index – where the money is only tracking the S&P 500 with only a 0.1% expense ratio and excellent returns. How come it is not on the list of the 20 funds for Veronica to invest her 401K in?
Instead, Veronica sees crappy funds with performance metrics twisted into positive words. Crappy funds like the FID CONTRAFUND K (FCNKX) and OPP DEVELOPMENT MKT (ODVIX) – both performing BELOW AVERAGE according to MorningStar, under-performing compared to the simplest tracking of the S&P 500 or the total U.S. stock market. But despite underperformance, both funds unbelievably charge WAY MORE fees. FID CONTRAFUND charges 0.61% in fees, and the OPP DEVELOPMENT MKT charges 1.05%, 6X – 10X more than index funds! How is this even legal? Why are these the funds shoved to Veronica?
The web of profitability for everyone but your retirement
These funds pay $$$$ to Fidelity to appear on the restricted list of funds for Veronica’s 401K. Supposedly in the name to protect Veronica from herself, but really, it is here to screw up Veronica’s retirement for the gain of these companies and money managers. ABC Incorporated allowed this to happen because let’s face it, HR has no clue about financial investment and it’s possible that ABC gets $$$$ from Fidelity for doing so.
Take these steps to avoid the scam
Legally, Fidelity cannot restrict Veronica to only invest in only the 20 funds listed on her 401K page. Veronica can put her 401K money into index funds at Fidelity. But she’ll need to set up another account within Fidelity, called BrokerageLink, and then transfer her 401K money to her Brokerage Link. Fidelity does not make this transfer easy. Veronica may not be able to find any information on how to move her 401K to her BrokerageLink online. In fact, Veronica probably has to call Fidelity and go through a 2-week, manual process that requires mailing some letters. Fidelity will make this process as difficult as possible so everybody can make more money off of Veronica in the name of protecting Veronica.
But if Veronica persists, she will transfer her money to Fidelity’s BrokerageLink where she can invest her 401K money in a range of index funds with low fees and excellent performance. I recommend the following:
- Fidelity 500 Index Fund
- Fidelity Total Market Index Fund
Who is running the 401K scam?
This scam is not only limited to Fidelity. Vanguard does the same and so does every single financial institution that invests people’a 401K money. Every firm has a set of actively managed funds with high fees that they would love for you to put your money into. More fees mean more money for everyone but you. By making only these funds available on a user’s 401K home page, these companies confuse users into thinking they are the only ones available to invest in.
This is why 401Ks is a scam. Profit-oriented institutions manipulate hard-working people into selecting high-fee, low-performing mutual funds that destroy their retirement. I want to emphasize the word “manipulation” because people didn’t fall into this trap because they’re stupid or uneducated. This is an elaborate, carefully manicured web of scams sliding past delicate boundaries of legality all aimed at making money off of you. It’s a miracle we aren’t all trapped!
If you don’t see index funds appearing on your 401K list, call up the financial institution and demand your money to be transferred elsewhere. Invest the majority of your money in index funds tracking the entire U.S. stock market. If the simple option of investing in an index fund that tracks the total US stock market does not exist, then get out fast and take your money to Vanguard.
Are all 401K restricted lists a scam? Are all actively managed funds bad?
Never trust a fund’s performance by looking only at the past five years (or worse, past one year or three years). Mutual funds manipulate time series to make themselves look great. (Look – I only made money in the past 2.5 years, but not the past one year or the past three years, so of course I’m only going to show the past 2.5 years of performance). Also, take a look at expense ratios and make sure they are less than 0.25%, ideally <0.10%
If an actively managed fund’s past ten-year performance has beaten the S&P 500 or the total US stock market, AND its expense ratio is also very low, then may be worth investing. Reality check, though: those funds do not exist. Or if they do exist, they are so popular that they’ll be open to only high network individuals and closed to little guys like you and me.