What is Wrong with a 401k?

Video Transcript 

My name is Robert Bonavito, New Jersey forensic accountant. This video is a part of a series of videos where I discuss forensic accounting topics for educational purposes only.

Every so often I have somebody come into my office, and they'll sit down and say, Bob, I have some problems I need to pay for college for my kids, or my wife's sick or I need money for this. And there's no money available anywhere because most of it's tied up in his business, he can't get it out.

So, we'll look, and the only money he has is in a 401K plan. And I tell him if you take the money out of the 401K plan, the taxes and penalties will probably take 60% of that money. So if you need $300,000, you're talking about $180,000 will go to taxes and penalties.

So, what that means is that all the money he put in the 401K plan was wasted money. He would have been better off not putting any money in the 401K plan, and that's what I'm going to talk about today.

We all have a knee jerk reaction when someone gets a job, a young kid, about the 401K. Max out your 401K, max out your 401K. Well, the truth about 401K is, most people pull the money out before they retire and they waste it. The fees are high, the investment options are terrible, there's a lot of things that make 401K's not...make it so that you should not do it.

So, if you are in a position to look at a 401K or contribute to a 401K, there's a couple of things you should look at before you decide to do it. One, does the company match? Is the company matching? Will they match 100%? Will they match 50%? Two, what kind of investment options, are they good investment options? Are they low-cost investment options? And three is the cost, what kind of costs are in that plan? And if you don't ask these questions, you may be wasting your money if you put your money in a 401K plan. There's lots of other things you can do with that money. Roth IRAs, you can put them in growth mutual funds, you can do lots of things with that money.

So if employer is not matching and you take a look at, there's high cost, you're better off not doing a 401K. And the problem with a 401K is a lot of people are young when they put the money in, when they get married and have kids and a house, that's their only savings, so they'll use that money.

So, the main point I want to stress here is, don't always think that investing all your money in a 401K is the best thing for you. There's lots of other options. Take your time and think about it. Sometimes I'll tell people to split their money between investments outside, like a Roth IRA or a low-cost mutual fund and then put some money in a 401K. If the employer has a 100% match and great investments, I'll listen, and you don't think you're going to need the money in the future, 401K is a pretty good deal, but they're few and far between, so think about it. Just don't automatically have a knee-jerk reaction, "I'm putting all my money in a 401K," not always the best choice.

If you have any questions about this, feel free to give me an email.