In 1980, Ted Benna discovered a two-year old tax rule and came up with an idea: a deferred-tax retirement account. Benna was able to shepard his retirement plan idea through the IRS regulations and created the first 401(k) retirement accounts for his employer and fellow employees. These plans were originally called Salary Reduction Plans because you receive less income as part of it is added to your 401(k) account.
Two years later, there were less than 100 401(k) plans by corporations. That number has grown into +50 million plans today with +$3 trillion in assets.
It was Benna’s intention to turn spenders into savers, which he believes that he has helped accomplish. But as for his 401(k) plan, he says, “I’ve created a monster and it needs to be blown up. It is so over complicated and fraught with abuse and hidden fees; and opportunities for bad decisions. 401(k)s are better at enriching the financial industry than the actual savers.”
These are the same complaints that I have highlighted for years: That 401(k)s are a financial prison where your money is needlessly chewed up by fees. So much money is lost in fees even your employer match and tax deferral does not make up for all of the fees charged to your account. As such, it is a very poor location for your money, a Roth-IRA or regular IRA are a far superior location for your retirement savings.
I have noticed two groups of opinions from people with 401(k) plans, and their opinion is solely dependent upon when they started making contributions. From 1984 to 2000, there was a giant run-up in stocks. Anyone invested in stocks or mutual funds through a 401(k) believes that these are the best savings vehicle ever. These people attribute their financial success to the 401(k) account and not the stock market. Meanwhile, those who invested in 401(k)s after 1999 have seen their accounts struggle for nearly 20 years. Neither of these groups have compared what their money would have done outside of their 401(k), and what their income tax rate is likely to do over the next 25 years. Whenever I have gone through alternative scenarios, the 401(k) is the worst location for your retirement savings, by far, even with an employer providing a 50% matching contribution up to 6%.