Why a 401(k) Is A Smart Move—Not a Scam

If you're on TikTok, you might have seen videos recently by so-called "finfluencers" falsely claiming that 401ks are scams. I've seen some of these social media videos myself, and I find them very worrisome. This kind of misinformation from unlicensed, uncertified, self-described experts—who are often trying to sell you a commission-based product—has the potential to cause real people real financial harm.

I've spent my entire career helping people build a solid financial future. I believe that a 401(k), when handled wisely, can be one of the most powerful wealth-building tools available. So here's my counter argument to anyone on social media trying to convince you otherwise.

If your employer offers a company match, and you don't contribute enough to get it, it's like saying "no thanks" to free money. Think about it. A dollar-for-dollar 5% company match means if you contribute at least 5% of your salary to your 401(k), your employer will also contribute an amount equal to 5% of your salary.

So, let's say you earn $60,000 and you contribute $3,000 (5% of $60,000) a year to your 401(k). With a 5% dollar-for-dollar match, your employer will also contribute $3,000 giving you a total contribution of $6,000. That's real money—and a powerful way to accelerate retirement savings. Employer match plans vary, but whatever type of match your company offers, it's worth getting.

There are several ways a 401(k) could help you save on taxes. With a traditional 401(k), your contributions could reduce your taxable income today. So, using the previous example, at tax time your taxable income would be reduced to $57,000. Not only that, the earnings on the investments in your 401(k) can grow tax-deferred until retirement.

With a Roth 401k, you pay taxes now but not only do earnings on investments grow tax free, your withdrawals in retirement (including earnings) are tax free. This could potentially be a good choice for people early in their career and in a lower tax bracket. And it could help make a huge difference assuming you're in a higher tax bracket when you retire. Even if tax rates go up over time, you're protected.

Either way, with a 401(k), Uncle Sam takes less of your money than he would if you kept it in a regular savings account. No scam here.

A 401(k) can help make saving easy. The money comes out of your paycheck before you ever see it. Think of it as paying yourself first. That consistency in saving, paired with decades of compound growth, is how your wealth could build slowly and steadily over time.

Let's use real numbers. Assume that you contribute $500 a month for 20 years, and your employer match also equals $500/month. Let's also assume your investments earn an average 6% annual return. After 20 years, with your company's match, you could potentially have $455,645. Even without your company match, you could potentially have $227,822.55. Where's the scam?

Some 401(k) plans offer lower-cost institutional mutual funds you can't easily access on your own. This is significant because not only does it potentially lower your investment costs, it also increases your opportunity to diversify your investments. While the critics like to focus on how a 401(k) can limit your investment choices, ultimately a 401(k) could give you access to investments otherwise unavailable to individual investors.

I'm not saying 401(k) critics are completely wrong. It's always important to look at the pros and cons before making any financial decision. The problem is, the complaints about 401(k)s you hear on social media are often exaggerated or taken out of context. Here are some examples and how I'd counter them.

That's somewhat true—there are restrictions. Generally you can't withdraw your money until your 59½ without paying a penalty. But isn't that the point? A 401(k) is designed for retirement.

That's always possible, but long-term investors historically see growth over time. Consider that since 1957, the S&P 500 index has delivered an average annual return of over 10%—creating substantial gains for investors with long-term goals. Also, when you diversify your investments, you can help lower your risk by spreading money across and within different assets classes, like stocks, bonds, and cash. It's one of the best investing strategies to weather market ups and downs while maintaining the potential for growth.

That is false. You control your investments within the plan. The government only sets the rules regarding contributions, withdrawals, and tax treatment. You make your own decisions about how you want to invest—and how long you want to keep your money growing. You could withdraw it before age 59½ and pay a penalty, and you could also keep it invested past that age to continue earning. It's up to you.

There are certain fees associated with 401(k) plans, but all participants receive an annual notice, which includes a breakdown of investment and administrative fees. Nothing hidden here. In fact, recent research from the National Association of Plan Advisors shows a steady decrease in both investment and record-keeping fees that reinforces a long-term trend toward lower costs for plan participants. Lower fees can mean higher returns, and ultimately more money for you.

The key to making a 401(k) work is to handle it wisely. What does that mean? Here are four suggestions.

• Find out if your 401(k) offers a match. If it does, contribute at least enough annually to get your employer match. Don't leave free money on the table.
• Gradually increase your contribution each year. If you schedule an increase around the time you get your raise, you may not feel as much of an impact to your take home pay.
• Choose a diversified investment mix that suits your goals. You could help spread your investment risk by first deciding how you want to divvy up your money between asset classes like stocks, bonds, and cash (your asset allocation). Then, invest in a variety of stocks and/or bonds that aren't likely to go up or down at the same time.
• Avoid borrowing from your 401(k). Unless it's absolutely necessary, remember, it's not your vacation money. Having an emergency fund in place can help you stay on track with your financial goals even when the unexpected happens.

If your plan offers it, work with a financial consultant to help you make your choices. Talk to them about what you want, your goals for the future, and the type of investments that might help you reach your long-term financial goals.

Bottom line? Base your money decisions on sound financial principles and trusted sources and watch out for potential conflicts of interest. Beware of social media misinformation that could potentially lead you down a path that could derail your financial dreams. The real scam would be missing out on the free money, tax advantages, and decades of growth that a 401(k) can offer.

Consider consulting a financial advisor or use information from reputable sources like Schwab Moneywise.com to determine if a 401(k) could be a part of your personal financial plan. Then make your own decisions on how to make your dreams come true.