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401(k)s are a scam?

Ugh, another day, another teeth grinding session as I read some whacko talk about how scammy 401(k)s are and how the secret to wealth is real estate.

Oh, p.s. make sure you purchase their book about how to invest in passive real estate!!!

Let me start off by saying that “scam” is not the correct word they’re looking for. A scam is a fraudulent business scheme, and 401(k)s are quite the opposite. The assets of a 401(k) are required to be held in a trust separate from the custodian or your employer. If something happens to either of them, your money is still yours. 401(k)s are federally protected from creditors which creates asset protection for you. Seems a bit of a stretch to call a 401(k) a scam…

Sure, there may be some downsides to 401(k) plans, which I think is their reasoning behind the scam claim, but every personal finance decision has a tradeoff, and utilizing a 401(k) is no exception.

Below are the negatives of retirement accounts that many of these salespeople peddle and some of my thoughts around why they are still a very appealing account to utilize.

Here are some of the reasons, and apologies for the rant-style writing if that isn’t your thing.

Company Match

There are arguments that a match is stupid. It is just a way for a company to pay you less in a salary, and put a vesting schedule on their deposits so that they keep the money if you leave early. And why is your company giving you free money?? BECAUSE IT’S A SCAM!!

Okay so any employee compensation with a vesting schedule is a scam? This includes equity compensation, claw back provisions on bonuses / relocation payouts and so much more. This is a way to retain good talent - of course I agree that it is a bit whack, but that is clearly not a scam.

And I agree that companies may pay a lower salary due to additional compensation in the form of a 401(k) match - if that bothers you, then try to negotiate with your employer to say I’m not taking the match, please increase my salary. If that doesn’t work, then you might as well take the match. Because if you don’t you’ll get a lower salary and no added compensation via employer 401(k) contributions.

Advisor Fees & Investment Fees

There is the argument that 401(k)s are pushed so that employers, Wall Street and financial advisors can get paid more.

I bet that is true for some people - there are bad actors in every industry. But account fees, investment fees, advisor fees all happen whether you’re investing in retirement accounts like a 401(k) or non-retirement accounts, so I don’t fully understand the argument.

Oh wait yes I do - a lot of these people suggest that ANY stock market investing is bad because of all the fees outlined above, and you should really hurry up and buy their book so you can learn how to invest in real estate which has absolutely no costs or fees to it!! (sarcasm). Same with buying permanent life insurance - why pay an advisor year over year when you can get crushed by insurance premiums that are hidden within the policy?

I get that I’m biased as a financial advisor, but I also believe there are great advisors that are well worth their fees. There are ways to pay vastly less in fees than the “averages” that many of these anti-stock market investors throw in your face. And of course you should make sure the advisor is bringing more value than they’re costing you.

You Can’t Predict Tax Rates

UGHHH. This one is really bad. The two schmucks that spread this the most are once again, real estate investors and permanent life insurance salespeople.

Maybe if you're not competent in taxes, you shouldn't be allowed to talk about them; just an idea.

They tout how amazing the tax benefits of the products they’re selling are and bash the tax drawbacks of anything else; which is all a lie! They are not tax professionals and disclaim that they cannot give any tax advice (unless of course they’re talking about the “amazing” tax benefits of their products).

This is truly so frustrating how they can spin things and blatantly lie and get away with it.

Anyways, I agree with the heading. You can’t predict tax rates. If you get a tax deduction today, you may pull the money out in retirement at a higher tax rate. But what they conveniently forget is that there are also Roth contributions in 401(k)s - which you can pull out with no taxes.

Utilizing the progressive tax system (which these whackos probably couldn’t tell you what that means) you could have some money in pre-tax and tax-free buckets and use the progressive system to your advantage. You don’t want all tax-free money in retirement! If you do have only tax-free money, there is a pretty good chance that you pre-paid too much tax throughout your lifetime. We should be focused on lifetime taxes paid, not just potential future taxes.

You also can’t predict property tax rates. Or capital gains / depreciation recapture rates when you sell your real estate property. Or interest rates when you take “tax-free” income from your permanent insurance policy (because that “tax-free” income is a loan; not actual income).

Your Money is Locked Up

UGHH I don’t know if I hate this more than the last but it doesn’t seem like it based on the amount of “H”s I used to start.


Real estate is an illiquid asset which means it is hard to turn it into cash. A 401(k) may actually be easier to access your money!

To get money out of your real estate asset, you need to either sell it (and pay transaction costs / taxes on the gains / depreciation recapture) or take a loan out on it, which also costs origination fees and interest.

To get money out of your 401(k), you can distribute the money, which may cause a penalty (not too different from transaction costs?) and taxes, or you can also take a loan from your 401(k). If you take a loan on your own 401(k), you actually pay the loan interest to yourself in your 401(k)!! #stonks How about that for “banking on yourself”?

There are other ways to get money out of your 401(k) and avoid penalties, like 72(t) distributions or Roth conversions - but these real estate bros have no idea what that means and have no interest in learning it.

My point is that your money is locked up in real estate. But less locked up in a 401(k). And, there is even some research around the “illiquidity premium”, or the added investment gains from not being able to touch your account, and let it grow over the long-term.

This is not some government conspiracy theory where they are locking up your money to screw JUST YOU when it comes time for you to retire. It is an agreement between you and the government that affords you tax benefits to encourage a successful retirement. If you think the government is really trying to ruin the average American’s retirement…. you’re unfortunately not alone but you also should maybe talk to somebody.

Final Thoughts

It can get frustrating to see so many social media 'experts' touting these lies with no regulation in order to further their own wealth.

Real estate can certainly be a way to build wealth. Some individuals have done it successfully and others haven’t. It isn’t the only way, and I’ve seen many be very successful and become financially independent by utilizing their 401(k) to the full extent.

Maybe that is why I care so much about this. When I worked with wealthy retirees, I’ve seen both ways work, but more often I’ve seen a large retirement portfolio than I have a large real estate portfolio.

One thing I’ve never seen: somebody that got wealthy from permanent life insurance. Sure, some wealthy people may have bought policies after they built their wealth for safer money, but never as an accumulation method.

In my opinion, we should be open to new opinions and the experiences of others; but it should set off big red flags when someone is pushing that there is only one way to get wealthy and other ways are a scam.


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