“The biggest risk of all is not taking one.”
– Mellody Hobson
Is a 401(k) relevant anymore?
Should you put money into your 401(k), like everyone says you should?
When I was an RIA (Registered Investment Advisor), I used to see people in many different retirement plans.
I’m talking millions of dollars saved up!
I’ve spoken with 2,500 investors and I still see this strategy.
The question is: Is it still relevant?
Can people create wealth through this?
Well, it depends.
Retirement accounts can help maintain your wealth.
This is especially true if you make a lot of money as a doctor or as a business owner.
But typically, people do not become wealthy simply by investing in different Wall Street assets.
The top wealthiest people in the world made money through businesses.
Look at Elon, Buffett, and Bezos.
They didn’t make their fortune by just investing.
The one who got the closest to doing that is probably Warren Buffett.
He had a business that would be a part of other businesses.
So, is a 401k relevant for your investing journey?
Let’s jump into it!
1. Limited Control
In a 401(k), you’re not the one pulling the strings.
When you’re in a Wall Street asset, you’ve got counterparty risks.
If either the bank or the issuer holding the funds fails, the investor loses money.
That’s you!
Your wealth is locked into Wall Street’s performance.
In my opinion, Wall Street is not on your side.
I have a whole chapter in my book, Fire Yourself.
Wall Street is not actually there to serve you.
There’s a huge misalignment of interest.
They can say they’re getting paid a certain amount, but also charge a bunch of back-end fees.
Tony Robbins talks about this in his book, MONEY Master the Game.
Legally, they can say mutual fund fees are 1.2% when it’s actually 3.5% in a mutual fund.
That’s nuts!
Investing in Wall Street also carries equal risk no matter if you put in money for the long- or short-term.1
There are too many disadvantages.
Now, I want to acknowledge that you can say a lot of the same things about syndicated deals.
You’re not the one in control or pulling any strings.
But with Wall Street, there are way more behind-the-scenes things going on that take advantage of people.
In general, you should say no to Wall Street.
2. Tax Implications
When you put money in an investment, a lot of it is pre-taxed.
This pushes you from paying tax now to paying tax later.
The downside is, when you’re ready to take money out, you’re taxed at a higher rate.
You can’t avoid this with retirement accounts.
The money has to be taken out eventually—even if you don’t want to.
You’re taking money you could invest and putting it into a 401(k)-type plan.
I should specify: A 401(k) is typically a company-provided plan.
They’ll have an agreement with Fidelity or Charles Schwab.
There are also fees involved, both disclosed and not.
If you have the option to avoid these plans, you should definitely at least consider it.
3. Better Alternatives
There are better alternatives out there than putting money into 401K.
I personally like real estate.
It offers better long-term returns.
The average stock market return has hovered around 10% per year in the last century.2
I’ve seen real estate return around 15% per year, especially commercial real estate.
Those are much higher returns!
Passive income builds wealth faster.
You might say that you’re passive if you’re investing through a 401(k).
In that respect, sure, you are passive.
But you’re almost too passive.
You’re allowing someone else to run the whole thing for you.
Are you able to scrutinize that performance?
How many stocks are in there?
It can be very difficult to see how things are going.
Another alternative asset I like is cash flowing businesses.
We buy cash flowing businesses because they have so much cash flow.
When you’re not in a retirement account, you can reinvest and do other things with the money.
You can even use it for things you need now.
When your funds are tied up in a retirement account, it can really penalize you.
I will also give a couple of caveats.
I think it could be a good idea to use a 401(k) if your company offers a match.
A lot of companies will match a percent of your contributions to the account.
That’s free money!
You can also self-direct your 401(k).
I did this myself when I was at a large medical device company.
When I was there, I didn’t like the investment options.
So, I told HR I wanted to self-direct my account.
They told me I could do it, but there was a two-year waiting period.
After that time was up, I could invest that money however I wanted after rolling it over to a self-directed IRA.
When you leave the company, you can roll over the account and self-direct it.
You should be wary if you do this, though.
There are some potential sneaky taxes if you have the wrong type of fund called a UBIT (Unrelated Business Income Tax).
You might need a solo 401(k) or QRP to help avoid these taxes.
There are many paths to choose from that are better than traditional retirement accounts.
Which one will you choose?
Let us know in the comments!
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
Works Cited
1. Z. Bodie. “On the Risk of Stocks in the Long Run.” Financial Analysts Journal (2005). https://doi.org/10.2469/FAJ.V51.N3.1901.
2. “The Average Stock Market Return: About 10%.” NerdWallet, December 17, 2024. https://www.nerdwallet.com/article/investing/average-stock-market-return.
