401(k) Investors Can't Get Money

Looks like I started kicking myself too soon.

A few weeks ago I explained why I’m going to have to spend the next few years as an indentured servant to the feds to pay the taxes and penalty on my 401(k) withdrawal…but if I hadn’t done it when I did, I may never have seen that money again.

The Wall Street Journal reports that 401(k) investors are finding that they can’t get their money.

“When Ed Dursky was laid off from his job at a manufacturing company in March, he couldn’t withdraw $40,000 from his 401(k) retirement account…”

“I hate to be whiny,” said Mr. Dursky, “ but it is my money,”

Turns out that the money you put into the 401(k) can be locked up a lot longer than you’d like. Most plans allow investors to borrow from their own accounts and some even allow outright withdrawal of matched funds—with the requisite 10% penalty and income tax. The only way to get all of it, however, has been to terminate employment…but now even that’s not good enough.

Of course if you’re the kind who pays attention to things like history and human nature, you’d have noticed the funny smell around the defined contribution plan a long time ago. And you would have seen this coming.

Here at Whiskey Bar we never stop casting a suspicious eye at the government and we turn our noses at their offers for help. We regret that this time around the feds aren’t the ones keeping voluntary and involuntary retirees from their cash.

Still, if the entire mess hasn’t filled you with fear and loathing, then I’ll have what you’re having.

General economic collapse means that fund managers are finding it in their best interests to limit reallocation and withdrawal by 401(k) investors. It doesn’t matter if you’re a 69-year-old recent retiree or a laid-off schlimazel who was counting on the money you’d saved to see you through a few months of unemployment.

Folks are starting to catch on to how important it is to own gold. We harp about that every day in these pages. Not a one of you reading this doubts for a moment that the value of little green pieces of paper that so many others take for granted is only good as a politician’s promise.

So what escapes me is why anyone smart enough to save in gold and silver would still tuck money away in a defined benefits plan. The circumstances concerning retrieval have always been extreme. We were assured this was for our own good. After all, this was supposed to be retirement money; the rules had to discourage us from getting at it ahead of time!

But the whole set up smacked of the sort of paternalism that really should have raised our hackles.

And now we discover that fund managers can keep our retirement funds…even after we’ve retired…or been separated from the payroll under less pleasant circumstances. Looks like in some cases, some folks may never see that retirement money. The value of their locked investments may dwindle to nothing or they may die of old age before things are sorted out in the courts.

I remember years ago when I began my working life and didn’t know enough to be wary of the state’s siren songs about financial security. I thought the 401(k) such a wonderful idea. As suspicion toward leviathan grew I still harbored a child’s hope that at least this whole “invest pre-tax and get a company match” thing wasn’t a trap. Of course, turns out it was…

The federal government itself hasn’t yet taken a turn at freezing 401(k) accounts, but this sudden if inevitable betrayal by fund managers should serve as a warning.

Please don’t let this happen to you. No matter how the feds try to lure you with tax-deferrals, no matter how tempting the company match is, don’t fall for it.

Granted, money you deposit anywhere besides your mattress can be nationalized or misappropriated, but putting funds into something like a 401(k) is akin to forcing your head into the mouth of the lion.

So what can you do?

Well, you don’t have to bind your retirement money with government red tape.

Fellow editor Jim Nelson sits just a few feet from the Whiskey Bar and in response to my outraged cussing over this news about 401(k) freezes he’s offered to share his own strategy for building retirement wealth.

And this is money that can’t be penalized by the feds for early withdrawal, or kept from you by callous fund managers…

Be sure to be reading when Jim Nelson stops by tomorrow to tend the bar.

Gary Gibson
Managing Editor, Whiskey & Gunpowder

May 11, 2009

The Daily Reckoning