Wednesday, October 30, 2013

THE SHIFT TO PRIVATE MONEY LENDING--Is your 401K looking more like 41K?

That’s my new montra. It seems everyone is so caught up in “safe” they forget to look at the cost of inflation and the fact that their savings are shrinking every month. So is that really “safe” to have your money tied up in a savings account, mutual fund, or cd (certificate of deposit)? Wouldn’t it be better to find another place to put your money that is at least as “safe” and gives you more income and earnings?

Last night I saw a wonderful and enlightening program by PBS/FRONTLINE called “The Retirement Gamble.” The program explained how people are losing much of their savings not only because of inflation but also from hidden or unreported fees that are charged in the mutual fund transactions and other service fees. (

What is interesting to me is that the TV program did not really talk about alternatives to the dilemma of lost savings other than starting to save at a younger age, working more years past age 65, and putting your money into broadly diversified index funds. Buy and hold forever to eliminate the multiple fees that are paid every time something is bought and sold within the mutual fund. The “alternative” investments in the 401K do not really let you diversify; your savings are still tied up in stocks and being eaten up by fees within the product. If you can keep pace with inflation you are doing great and at least not going backwards. We in the public get caught up in the hype that some fund has “out-performed the S&P” and we forget that past perform is no guarantee for future performance.

Now you are wondering what an index fund is. Wikipedia defines “Index Fund” as:

An index fund (also index tracker) is a collective investment scheme (usually a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. As of 2007, index funds made up over 11% of equity mutual fund assets in the US.[1]Equity Index Mutual Fund Assets as a Percent of Equity Mutual Fund Assets 1985-2007, source: Investment Company Institute)

The index fund does not typically have an active manager who is looking at individual stocks, or brokered stock and picking and choosing different stocks because he/she likes the management of a particular company. Thus the index funds have fewer changes in the stock mix and thus have lower costs.  Your funds do however float up and down with the general stock market, so the fund is still tied to the stock market.

Another interesting tidbit from the Frontline report is that the 401K started as a tax dodge for high corporate earners through a tax loophole in the IRS rules. (I had never heard that before.) But banks saw a way to sell this new 401k product to the general public and thus expanded the 401K system to smaller businesses and the general public. Many 401K programs were wrapped up solely in the stock for the particular company. People sank all their savings into company stock and then when the stock market crash came, all their accumulated value was wiped out or nearly wiped out.

There are many people who have “seen the light” as it were and have started to move their money to SDIRAs (Self Directed Individual Retirement Accounts). The advantages of a SDIRA are many, but perhaps one of the biggest advantages is the variety of assets that can be owned by the SDIRA.

SAFEGUARD (IRA & 401k ADVISORS-- outline the items that can and cannot be purchased through the SDIRA as well as outlining other restrictions. A partial list outlined by SAFEGUARD shows the IRS allows the following items to be owned in the SDIRA: 1) real estate both improved and unimproved, 2) secured and unsecured notes, 3) tax liens and deeds, 4) judgments & structured settlements, 5) accounts receivable factoring, 6) commercial paper, 7) equipment leasing, 8) precious metals, 9) private company stock. This is not an exhaustive list and here I have to make a disclaimer that you should consult a professional financial advisor before making one of these purchases with you SDIRA. There is also a restriction on buying from or selling to a disqualified person or entity that might cause the appearance of self-dealing.

You can determine how the money will be invested, pick strategies and products that grow faster than the standard CD or mutual fund with less fees. People have started to realize that they have to take a more active role in directing their retirement or they will continue to be at the mercy of the fund management. No one has a vested interest in your retirement other than you and your family.

I like the way SAFEGUARD has their website laid out, but I personally have my SDIRA through HORIZON TRUST COMPANY (

Millions of dollars have now migrated to SDIRA funds and people in these funds are looking for good, safe and profitable investments

Next time I am going to talk about PRIVATE MONEY and how people are getting bigger returns with their 401K and SDIRA funds. And I will work my way back to the subject of mortgage broker soon.

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