Your 401k is a Scam

Your 401k is a Scam

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9 Responses

  1. MC says:

    Your math is a little flawed, it’s important to evaluate the taxes that you’re paying year-over-year for the things in a taxable account. Additionally note that most people, at least today, don’t work at the same employer for their entire working career, meaning that you can roll that 401k into an IRA and buy the same crap that you’re buying in the taxable account.

    Additionally, most 401ks have lower cost, passive vehicles that you can invest in, which are still more expensive than what you could buy in an IRA but not a 1% difference.

    Finally, you don’t even mention making annual contributions to IRAs.

    • Thanks for the reply Michael. A few things: I believe I do evaluate the taxes you pay year over year in a taxable account. As mentioned, Jane can only contribute $4100 where Joe contributes $5000. This is due to taxes. Otherwise, no further taxes are paid until the gains are realized and I account for this at the end of the term. You seem to be a fan of IRA’s. Me too. I’ll write about those another time, but I tried to simplify the concepts by just comparing 401k’s to regular investments rather than going into every single different retirement vehicle, as there are plenty more to cover. I agree that is possible to invest in funds with lower fees than 1%, as I do it myself. However, as I mentioned, 1% is just an average of what people are paying in their funds(some as high as 2%). Doesn’t mean they have to be.

  2. less4success says:

    I think scrutinizing investment options and fees in your 401k is prudent and it’s possible a 401k with no match might be a bad choice (as in your example), but 401ks in general are not a scam.

    Take a look at The Mad Fientist to see a scenario where retirement account have a strong positive impact (along with tips on how to get money out before age 59 1/2).

    • Agreed, of course I don’t think they are always a scam, as I invest in a 401k myself. Admittedly, the title is supposed to be controversial to get people thinking and running the numbers themselves! A few may be surprised to find that they are Joe Shmoe in the scenario.

  3. Not Your Average Joe Shmoe says:

    Hi Jack! While I appreciate you challenging status quo and encouraging your readers to dig into their investment decisions to ensure best performance for their needs, I must disagree with your point that my 401(k) is a scam. Here’s why: My employer provides a 1:1 match for up to 6% of my salary. Right there I am guaranteed a 100% return. Easy money. For argument’s sake though, lets assume I don’t get a company match…

    I allocated my 401(k) contribution across 3 funds with various investment strategies and objectives. The weighted fee of my investments is a mere 0.04% and gross return for 2016 is 11.96%, leaving me with a net return of 11.92%. Addressing your concern that funds “DON’T BEAT THE MARKET +85% OF THE TIME”, I took a look at S&P 500’s performance over the same time period. For 2016, the index rose from 2,013 points to 2,239 points, and increase of 226 points or 11.24%. My 401(k) provided me with returns 68 basis points higher on an absolute basis or 6.1% higher on a relative basis.

    Safe to say that I won’t stop investing in the “scam” that is my 401(k) anytime soon. 🙂 Thanks for the interesting content! I look forward to keeping up with DTMC!

    • 1. Did you read my paragraph about employer matches saying that you should always take advantage of them?
      2. In regard to your .04% expense ratio: nice, that’s a good plan. I mentioned that 1% is the AVERAGE expense ratio and doesn’t apply to everyone.
      3. You argued my concern of mutual funds not beating the market 85% the time. I said go Google it if you don’t believe me ;). They lose 85% of the time ON AVERAGE OVER TIME. Just picking one year where your portfolio performed well is not an accurate representation of overall performance.

      Thanks for reading and please let me know if you have any questions about the points made above!

  4. Eric says:

    Thank you for writing this article! I have been investing since my teenage years and have built a sizable nest egg for someone my age. I have been skeptical of 401ks for the exact reasons you laid out, mostly that it’s taxed as a whole and at the ordinary income rate. Anyone who knows anything about money knows that you want to make money that gets taxed at the capital gains rate. Also, my employer and many others do not match at all! So I just keep my money and invest it myself. When I tell people I do this and don’t contribute to my 401k, they look at me like I just told them I’m a cannibal. When I tell them aloud that 401ks are a scam it’s like I’m talking to north koreans or something. Thank you for outlining and confirming my suspicions! Keep up the good work.

  1. August 9, 2017

    […] was not contributing to my 401k since it wasn’t matched. Check out this post if you want to hear me rant about 401k’s. Now that I’ve been there for a […]

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