Robert Kiyosaki, known as the “Rich Dad,” has been instrumental in educating many people about financial literacy. He holds an unpopular view that the 401(k) is a poor retirement plan.
Indeed, he is not alone in this perspective. According to an article by The Wall Street Journal titled “Advocates of 401(k) Deplore the Revolution They Started,” several early staunch supporters of the 401(k) retirement plan now express regret and wish they had not advocated for it, despite it becoming the primary savings method for most Americans.
Some argue that the 401(k) plan was not originally designed to be a primary retirement tool. They also acknowledge that overly optimistic forecasts were used in the early promotion of the plan.
Others say that the widespread adoption of the 401(k) plan exposes employees to the risks of stock market fluctuations, high fees from Wall Street fund managers, and makes companies more likely to abandon support for retired workers.
According to Kiyosaki’s Rich Dad blog team, in the 1970s, the 401(k) retirement plan emerged as a supplemental plan to company pensions, where pensions should have been the main focus. Today, for most people, the 401(k) has become their sole retirement plan.
Since the inception of the 401(k) plan, there have been significant changes in the world. We now face crazy market fluctuations, evolving work environments, and the long-term impact of global pandemics. Putting all your bets on the 401(k) retirement plan? Kiyosaki’s team sees this as a very risky move.
In addition to the numerous mistakes that can be made in utilizing and managing a 401(k) plan, the plan itself has flaws:
– The 401(k) heavily relies on the market and is essentially tied to stock market performance, resulting in its instability. This means that the economic instability directly affects the stability of the 401(k). Investing your future solely on the rise and fall of the market is a risky behavior.
– The management fees of 401(k) retirement plans are high, which can erode your returns in the long run. These fees are often hidden in the legal terms of contracts. As your 401(k) funds start to grow, someone is skimming off a portion before you have a chance to enjoy it.
These fees include trading fees, legal fees, recordkeeping fees, and more. Mutual funds typically also extract a certain percentage of fees from your investments, usually around 2%.
According to FRONTLINE PBS, John Bogle, founder of the Vanguard Group, revealed in an interview many years ago the following information regarding the management fees of 401(k) plans.
When asked about the percentage of the net growth of 401(k) plans used to pay management fees, Bogle said: “Let me give you a long-term example. I use in the book a 20-year-old starting a fund for retirement. And that person has 45 years till retirement (from age 20 to age 65) and maybe another 20 years, if you believe in actuarial tables, from 65 to the end of life. So, that’s a 65-year investment. If you start with $1,000 and it grows to $14,000 over that period at an 8% return, which I use, that’s the number I’ve used. And the financial system—the mutual fund part of the system—takes about two and a half percentage points off that, so you end up with the gross 8%, the net 5.5%. And so your $1,000 grows to roughly $3,000. And, well, $11,000 goes to the financial system and roughly $3,000 goes to the investor. Think of that. It means the financial system put up 0% of the capital, took 0% of the risk, and got almost 80% of the return, and you, the investor, in that 65-year period, in your lifetime investment, you’ve put up 100% of the capital, taken 100% of the risk, and gotten a little over 20% of the return. That is a reversion.”
In addition to high fees, your control over funds is limited. In a 401(k) plan, you typically invest in funds and indexes controlled by brokers, who are controlled by bankers, who invest in companies controlled by boards—none of which you have control over. You also cannot access your funds without paying fees.
Lastly, the government limits your investment amount. The IRS sets contribution limits annually, with the limit for 2025 being $23,500. If you want to contribute more than this limit, you must pay taxes and penalties.
Another issue surrounding 401(k) plans is taxation. 401(k) funds are taxed at higher income tax rates rather than lower capital gains tax rates. Other types of investments, such as real estate and regular growth accounts, are subject to capital gains tax. Why the difference for 401(k)?
This can be attributed to the 1978 Revenue Act, which allows workers to defer taxes until they withdraw funds from the plan, typically at retirement.
Therefore, when you start using 401(k) funds, you will need to pay income tax. While this may not seem like a significant issue now, if tax rates increase, you may end up returning a large portion of your retirement savings to the government.
Kiyosaki’s team believes that people mistakenly view employer matching as a benefit when it is merely an illusion of additional income.
Employers understand that without 401(k) plans, they would have to pay this money as wages to employees in order to remain competitive. Today, employers are only obligated to match funds when you choose to participate in a 401(k), and there is actually a limit to the amount matched.
Additionally, there is the issue of vesting periods, which means that unless you work for a few years, avoiding early resignation, you do not fully own the company-matched funds. This is not just a benefit but also a strategy to retain you without increasing wages.
If the 401(k) plan is not entirely trustworthy, what alternative or supplementary solutions can give you more control over your financial future?
Why let fund managers make all your investment decisions for you? Managing stock investments yourself allows you to choose where your funds go. Additionally, there is no limit to the amount you can invest annually, so you can adjust your investment strategy based on your financial situation or market changes.
Kiyosaki has long advocated for real estate as one of the ultimate investments, a fantastic way to generate stable passive income. Whether purchasing rental properties in economically thriving areas or investing in Real Estate Investment Trusts (REITs), proper real estate investment behavior can bring you stable income.
Owning properties like multi-family residences not only provides regular rental income but also potentially increases in value over time, offering both immediate income and long-term growth.
This is a big issue. The more you know, the wiser your actions will be. Investing in financial knowledge can immerse you in a whole new world. Whether attending stock market investment courses, reading real estate books, or delving into tax strategies for retirees, knowledge can bring returns. Understanding market trends or the best timing to sell properties can significantly improve your financial performance.
While Kiyosaki’s team recognizes the many issues with 401(k) retirement plans, they also acknowledge that for most people, being forced into a 401(k) plan may not be a bad thing. This is because most people have had little financial education and do not know how to handle excess money beyond saving or spending.
Therefore, they state that for those who have not received much financial education, the 401(k) may be the best investment. If you have not received the necessary education and cannot find and manage a good investment wisely, then do not opt out of the 401(k) retirement plan.
If you wish to opt out or want to do more retirement preparation on top of a 401(k), then devote some time every day to financial education. This is an investment that will surely bring you rich returns.