Should You Invest In Your Employers 401K Plan (Or Other Retirement Plan)?


A few months ago, I posted an screenshot on Instagram of an old 401k account statement from a job I worked at for a period of 4 years.

I started this 401k account with a zero balance and over the 4 year timeframe in which I worked at that job, I saved $81,490 which included my 401k match. Shortly after I shared that post, someone left this particular comment -

"401Ks are for chumps. 2/3 of that money will be gone in taxes, (and) fees that you don't know about and that they are legally allowed not to tell you about. You will be taxed at the rate at which you retire, which will be more than you are. Inflation will cut that by 2% every year. It's a big game and you are falling for it. Why would you put your money in a 401k when the banks just print more money?"

So l thought it would be a good idea to address this person's concerns and to talk through whether or not it's a good idea to invest in your employers 401k plan.

I'll be honest and say that yes, I agree with a portion of their comments in regards to the following points and I'll add a couple more cons to the list:

  • Some 401k's can be expensive, have hidden fees and can be very limited in terms of where you can invest.
  • 401k contributions are before tax which means when you start to withdraw it, you will be paying tax at whatever you future tax rate is and what future tax rates will be, are hard to predict, but they could very likely be higher than present day.

BUT this person is wrong in so many ways. Let me explain:

1. For many people, investing in a 401k is their first real introduction to investing

Before being exposed to a 401k a large number of people have never really been exposed to or had the opportunity to invest in the stock market. A 401k provides that opportunity and allows it to happen in a painless way through automatic deductions from your paycheck.

Yes, there can be high fees to manage your account and you will be limited to investing in only what is offered through your plan, but investing in a 401k plan is a good start and a great way to take advantage of an employer match if one exists, pre-tax investing benefits plus 401k plans have much higher contribution maximums than IRA.

2. There is a great opportunity for pre-tax contribution growth

The growth of your pre-tax contributions especially over the long term may very likely far outweigh any taxes or fees you incur when you start to make with withdrawals from your account. In addition, the growth from the free money you get via your employers match may be able to take care of some or all of those taxes and management fees you incur.

3. Retirement is not a date, it's a period of time lasts for several years

2. Retirement can last upwards of 20+ years which means when you retire you are not instantly withdrawing all your money in one go to be taxed. Your money still has more time to keep growing and you should have an investment strategy in place that transitions to making your investments more conservative as you age to hedge against major losses in a market decline.

Many people should (hopefully) be spending less in retirement than they did while working because their kids are out of their house (again hopefully lol) or they have much fewer child related expenses, their mortgage should be paid off etc (all part of financial planning) and so your taxable withdrawals and in turn your taxable rate is likely to be lower.

4. Your money doesn't need to stay in your 401k forever

Most people do not stay at their jobs from when they first graduate college until when they retire. Classic example, me! I switched jobs 4 times over an 11 year period before I started working for myself.

This means that when you leave a job, you can rollover your 401k money into an IRA and invest it more cost effectively (much lower fees) and with more transparency than your employers 401k - you are not stuck there forever.

You are also not limited to only investing in your 401k. You can have a 401k, IRA and non-retirement accounts as well. There are several different avenues through which you can invest in the stock market. I now invest in my own IRA and through my non-retirement investing accounts. Index funds are a favorite of mine and I know exactly what I'm paying in fees.

My point with this story?

Don't ever let ANYONE make you feel stupid for making smart money decisions. Do your research, determine your investment objectives, have a long term plan that you adjust as necessary and stay the course when it comes to pursuing your financial goals.

If I didn't know anything, was just starting out with my 401k and this person who left the comment was someone whose opinion could influence me, I could very well, based on their advice have invested nothing, got no free match and lost out on the chance to build additional wealth by investing in my 401k.


In this instance, I'd rather be a chump so thanks for the compliment.