Does a 401(k) Make Sense, or Should I Invest Those Funds Elsewhere?

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I’m sure you’ve thought about whether or not your 401(k) is a good investment vehicle to utilize. If you are like most people, you may have trouble quantifying the total returns so you religiously contribute money on a bi-weekly/monthly basis, but feel like you are investing blindly.

Growing up I was lucky to have parents and family who openly talked about finances. Although 401(k)s were often discussed, I was too young to fully wrap my head around the concept. Once I became a CPA and began taking on individual clients, I began to notice two trends: (1) 401(k) balances are relatively low compared to what I was told they were supposed to be at various ages and (2) people who are investing in their 401(k)s often cannot tell me whether or not it has been a good investment vehicle for them, even if they have been utilizing a 401(k) for years.

It turns out my clients and family members weren’t far from the norm of Americans. The average 401(k) balance has been increasing year over year and hit all-time highs in 2014. This is mainly due to the market’s returns over the past few years and larger contributions from employers and employees contributing to 401(k). Additionally, nearly 79% of eligible workers were participating in 401(k) plans at the end of 2014. So plenty people are participating in their 401(k) plans.

Fidelity suggests the average worker has saved 8x their salary by the time they retire, yet a study done on 401(k) balances for the typical middle class worker found that pre-retirees, those aged 55-65, had an average balance of only $100,000 saved. If your ending salary is $90,000, your 401(k) should have $720,000 based on Fidelity’s general rule. Your 401(k) balance, based on the 4% rule, provides you with $28,800 in withdrawals each year in retirement.

Related: You Should NOT Bank on Your 401k For Retirement. Here’s the Superior Alternative.

Why the big discrepancy? I think there are many reasons; however, I am going to discuss the two that I believe to be among the most critical: failure to rebalance and high fees. I’m also going to attempt to quantify the 401(k) investment vehicle as a whole and show you what the typical 401(k) must earn in order to make the contributions worthwhile, rather than simply forgoing the 401(k) and investing that money in the market.

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Failing to Rebalance Your 401(k) Will Sink You

It blows my mind how many people invest in 401(k)s blindly. By that I mean they don’t really understand what they are buying with their money, they don’t understand how the funds operate, they typically don’t know the 401(k) rules, and they certainly don’t rebalance their portfolio. In fact, only 15% of 401(k) participants rebalanced their 401(k) in 2014. This statistic alone shows me that many people truly “invest and forget” with their 401(k)s. Do you think financial advisors/money managers rebalance their client’s portfolios every year? You bet they do. And if they don’t, they have a really good reason not to.

The problem here is that 401(k) participants aren’t adapting their portfolios to new market trends. The argument can be made that personal investors tend to do worse than the market as a whole, as they make poor, emotional decisions – in fact, in 30 years, the average investor has returned a measly 1.9%. But does this mean the plan participant should never rebalance their portfolio? Absolutely not.

A 401(k) is not something to “set and forget,” as your returns will drastically suffer. By not rebalancing your portfolio, you become overexposed to certain asset classes. Maybe you are a 25-year-old and overweight in bonds, which slows your portfolio’s growth. Or you are 65 and overexposed to equities or emerging markets because you haven’t rebalanced in years and the next market crash wipes you out.

You should rebalance at least once per year. Make it a New Year’s activity. Read about the market and events that are expected to occur in the next year. Use retirement calculators and asset allocation calculators to determine your ideal asset allocations. Pay a financial advisor $80 for an hour of his/her time and have them review your 401(k) balances. It will be worth it in the end.

401(k) Plan Participants Don’t Understand Fees               

There are typically high fees involved with 401(k) plans. The employer is required by law to shop around in order to get the lowest fees for their employees, but at the end of the day, the employer has the luxury of passing the plan fees on to the employees.

Fees range from plan administration (usually low) to fund management (usually high). The fund management fees are what plan participants can and should zero in on. Even though the participant has a limited selection option of funds to invest in, the participants can still pick funds with lower fees involved. Ideally, the participant would not invest in a fund charging more than 0.1% on assets. Sadly, I see many people paying 1% or more on investable assets, and those are only the front end fees.

Be sure to look at each of your plan’s fund choices carefully. Sometimes funds will have posted large returns in years past, but will charge an exorbitant fee. Be careful investing in these funds, as historic performance is not an indicator of future success, but the fees are for certain.

What Does the Typical 401(k) Plan Need to Return to Make it Worthwhile?

The big question is: Should I invest in my 401(k) or use the post-tax funds to invest in the market or alternative asset classes, such as real estate? The answer is quite complicated, as there are many variables involved.

My modeling was based on the assumption that tax brackets will never change, which of course is laughable. But it’s all I have to go on since literally no one can predict the tax or political environment in 30 years. So take my model with a big grain of salt.

Using the model I have uploaded into the BiggerPockets Fileplace, I have assumed that the average 401(k) return is 6% and that the geometric mean of the market since 1965 is 9.84%. I have two scenarios: the 401(k) contribution scenario and the non-401(k) scenario, which assumes that you have forgone the contribution and instead invested the post-tax money in a low cost index fund. My model only looks at the money you contribute or forgo to contribute.

Assuming a starting salary of $60,000, an annual raise of 5%, an annual contribution of 6% and a 50% employer match, at the end of 30 years, the 401(k) will have a higher balance than the “non-401(k)” option: $767,636 vs. $670,532, respectively. At 30 years I assumed we retire and begin withdrawing 4% for each scenario. After an additional 20 years (at the end of 50 total years), the 401(k) ending balance is $1,088,172, while the “non-401(k)” ending balance is $1,936,667. The big eye opener was that the 401(k) will generally outperform your post-tax money until you retire and no longer receive employer contributions. At that point, the “non-401(k)” portfolio drastically outperforms the 401(k) portfolio.

I also found that taxes are a moot point. Assuming a 4% withdrawal rate in both scenarios, the tax rate will be the same (15%) until the 401(k) withdrawals push the owner into the 25% tax bracket, as you will be paying 15% on the “non-401(k)” gains in the form of capital gains. Total taxes paid are going to be higher for the “non-401(k)” scenario, but the portfolio ends up with a significantly higher value than the 401(k) portfolio, which effectively makes the tax argument invalid.

Related: 7 Things to Do NOW to Get Your Financial House in Order

The good news is that I found if your 401(k) earns only 7.72% annually, assuming all the variables above, your 401(k) portfolio will have value equal to the “non-401(k)” scenario at the end of 50 years. This means that the answer to the “should I invest in my 401(k) or not” question comes in the form of another question: Will your money earn at least 7.72% annually in your 401(k), and if not, will you invest your post-tax foregone contribution, and will that money earn 9.84% annually?

401(k) pic 1

401(k) pic 2

What Am I Doing?

An employer match is a big component of a successful 401(k) plan, and unfortunately, my employer will only match 25% up to 6%. Because of this, I have decided not to participate in my employer’s 401(k). I’m sure it may make sense in the future, but I need to earn more and see a higher employer match first.

One thing I didn’t mention in this article was solo-401(k)s for self-employed individuals and business owners. Due to the significantly higher contribution limits for solo-401(k)s, I can’t think of a time where it wouldn’t make sense to max out this investment option, financially speaking.

Disclaimer: This article does not constitute legal advice. As always, consult your CPA or accountant before implementing any tax strategies to ensure that these methods fit with your particular situation.

[Editor’s Note: We are republishing this article to help out our newer members.]

What do you think of investing in a 401(k)? Would you ever invest your funds in one, and if not, what’s your vehicle of choice?

Let’s talk in the comments section below.

About Author

Brandon Hall

Brandon Hall is a CPA and owner of The Real Estate CPA. Brandon assists investors with Tax Strategy through customized planning and Virtual Workshops. Brandon is an active real estate investor and a Principal at Naked Capital, a capital group investing in large multi-family projects and manufactured housing. Brandon's Big 4 and personal investing experiences allow him to provide unique advice to each of his clients.


  1. Ryan Arth

    This discussion mainly focused on 401k=stock market. What I always go around about is contributing or not based on solely on tax avoidance on a year to year basis. You can self direct that money into many different asset classes, but it could take years of contributions to have enough to do something meaningful with (simple iras only allow 12500/yr).

    So you are left with putting that small balance into the market until you have enough to make it worth buying something other than equities or you leave the money sit idle. I cannot see a scenario where letting the balance sit uninvested for four or five years in order to achieve a greater return in a fifth year would be a slam dunk idea in the future.

    This is the dilemma that I keep running up against, tying that money up every year in the retirement account just to reduce my current taxes.

    It was a well thought out and insightful article Brandon, unfortunately I think that the people who need to read this most are not hanging out reading articles on BP. . .


    • Ken Breeze

      Great comment @Ryan, and yes @Brandon, if not already, you should definately start posting your blog posts on Linked In and Medium. There is a huge blue and white collar audience in those channels that need to see your education. Cheers, and keep ’em comin’ Ken 🙂

  2. karen rittenhouse

    What a fabulous and necessary article.

    I have found the same statistics – average gain over the life of a 401K is less than 2%. This number also means a ton of people are losing the actual money they’re putting into their 401K and almost no one is keeping up with inflation with this “savings” source. 401K was designed as an additional saving vehicle for the wealthy, never as a retirement plan.

    We pulled our money out early in our investing career and put all of it into real estate. We are very glad we did because, for us, the returns have been phenomenal with real estate. We paid attention and were very conservative in our investing because this became 90% of our retirement income focus.

    This article will answer a lot of investor questions. Thanks for offering the time it took to put this together.

    • Brandon Hall

      Thanks Karen! I didn’t necessarily want to say “you shouldn’t utilize a 401(k)” but moreso present the facts that show how your 401(k) would have to perform to be considered a viable option.

      I appreciate you reading the article and your kind words!

  3. Another factor that is not mentioned is the protections from creditors are usually greater for retirement accounts than for other investments. If you are hit with a federal lawsuit for lead paint, etc. the attorney will have a hard time touching a retirement account, but they can easily end up owning your rental properties. That being said, I only put in enough to get my employer match, since my returns have been much greater with real estate.

  4. Bennett McEwan

    Brandon, you say that you’re not participating in your employer’s 401k because the match is only 25%. It’s very foolish to leave that money on the table. Where else can you get an immediate 25% ROI with zero risk? You can roll over the 401k money into a self directed IRA at some future point.

    • Brandon Hall

      Hey Bennett, thanks for your comment and good point about rolling over into an SDIRA.

      I don’t consider forgoing the company match, for my particular situation, as leaving money on the table because I firmly believe I can earn a better rate of return on my post tax money over the course of many years. For my situation, investing in my employer’s 401(k) and getting the match is actually leaving money (that I could invest elsewhere) on the table.

      Believe me, I’ve considered an endless amount of scenarios and even in conservative circumstances, my 401(k) offering doesn’t make sense.

      • Brandon Hall

        Zero risk is a flawed assumption. You only get that 25% match IF you contribute to the 401(k). So you’ve exposed yourself to control risk, vesting risk, liquidity risk, etc. etc.

        Nothing comes with no risk my friends – “smaller” would have been a better word.

        • Aleksandar P.

          Brandon, you are right, nothing comes without a risk. I expose myself to the certain degree of risk by driving 10 min to my job and then back home, every day. But, let’s be real here.
          If you direct your 401k contribution to Cash (Money Market Fund with minimal expanse ratio) and your employer matches that with 25c on every $ you contribute, you get 25% ROI immediately with practically zero risk. Can you please explain to me where you can get that kind of return on annual basis within the almost zero risk?

        • Brandon Hall

          Aleksandar – the big flaw in your argument is another risk that I failed to mention in my comment above: opportunity cost. If you know what diminishing marginal returns are, you will realize that your employer match effectively phases out it’s usefulness rather quickly. This is because your as your portfolio grows, your match becomes (relatively) less powerful as 25% of your salary is no longer a significant portion of the principal balance of the portfolio. Your 25% match in 30 years will no longer be a 25% return on your portfolio. This is a common fallacy among the thinking around 401(k)s.

          The most important factor is: what is your overall rate of return?

          If we take your example where you leave your money in the 401(k) all cash and just take the 25% match each year, the post-tax portfolio’s value will eclipse the 401(k) value in a matter of 17 years. That’s a relatively short time frame in terms of your entire investing career. And that doesn’t take into account inflation, which will erode your portfolio’s value even further.

          If you look at my scenario from the article and change only the employer match from 50% to 25%, at the end of 30 years the 401(k) portfolio value will be $639,697 while the non-401(k) portfolio value will be $670,532. Of course there were massive assumptions involved, but that’s going to be the case with any futuristic modeling.

          Does the 401(k) match make it less risky than a regular portfolio? Absolutely. But over the long run, the riskier portfolio isn’t substantially riskier, and you will earn a premium on your money for taking on that “risk.”

        • Brandon. Your comments to Aleksandr were wrong again.

          His point is that you get a 25% return on what you invest in a 401k. Not on money already in a 401k.

          If you make $50,000 pretax and deposit 6% which is $3,000 then your employer match is worth $750. That is the 25% return. If your salary increases over time then the match will increase as well.

          This is why people are confused you aren’t taking the match. In addition if it is a pretax contribution then you can enjoy tax savings and tax free growth over the years until you withdraw.

          Can you find a real estate investment for $3,000 that guarantees a return of $750? That is even before the money is invested and gets 30 years of tax free growth.

        • Aleksandar P.

          Brandon, you completely misinterpreted what I just said. It makes me think that you really don’t understand what employer’s match in 401K means and that could be the reason why you don’t use it.

          Kyle Cook, thanks for clarification on this issue and also thank you for your sensible and valuable input to this “401K discussion” .

        • Brandon Hall

          Kyle, perhaps you should re-read his comment. I understand his point completely, but you guys are looking too near-sighted. It’s the big picture that matters.

          His example of directing funds toward cash holdings and simply taking a 25% match for a 25% return doesn’t work out to be a 25% return as the years go by. Sure it’s a 25% return on the contribution itself (of which I didn’t argue if you re-read my comment), but not a realistic or helpful example.

          Additionally, you should re-read my comment, because (as I’ve already stated) I didn’t argue that the return on the contribution themselves isn’t 25%. I argued that the value of the contributions in relation to the portfolio over time becomes eroded, even as your salary increases.

          Year 1 – $3,000 contribution and $750 match. 25% return.
          Year 2- Beg. Bal. = $3,750; Add contributions of $3,000 and $750 match. The match is now an 11.1% return. That’s what I’m talking about. You can even scale up the contributions with salary increases. The result is the same – diminishing marginal returns.

          Including the match, assuming all other variables we have been talking about, your 401(k) would need to earn, on average, 6.30% to keep pace with the non-401(k) portfolio over the span of 30 years. Expand the scope of time to 50 years and that break-even return becomes roughly 8.25% assuming you retire at year 30.

          Again, plenty of assumptions have been made here.

          Kyle – why don’t you develop a model that quantifies 30-50 years of 401(k) contributions vs. post-tax investing? It will allow us to have a better conversation rather than you simply posting comments after me and telling me I’m wrong. Based on my assumptions, which I’ve clearly stated several times, I can’t be wrong because they are assumptions after all 🙂

        • Brandon,

          This is nothing personal. I just want accurate financial information in the open. A lot of people are asking for your advice. Attack my model and ask away. Hopefulyl after reading the ICI study you realize that there is no reason to take away so much return from the 401K and in fact it should be higher.

          I took up your challenge to make a model and I also did some research. I’m tired now so I didn’t finish the cost basis model and was a little confused as to you why you didn’t give the person credit for reinvested dividends and cap gains. And the cost basis you deducted seemed a little weird. I would assume with market fluctuation and perfect records the individual could use spec id to use up as much cost basis in the non-taxable account and then die which would allow the heirs to step up the cost basis. Didn’t have time to finish.

          Based upon the studies and the fact that I chose a Fidelity fund I’m assuming plan fees are negligible I originally didn’t adjust the Fidelity returns at all. But lets assume a terrible plan charges 1% in fees, even though the study I linked to says 401k participants actually pay less and they are charged 1.11% which takes the return down to 9% then they would only have about $914k or a $245,315.92 improvement over taxable. This goes down to a 37% improvement.

          My assumptions are that the deposits are made January 1, I don’t have time to model out biweekly matching deposits. Since my individual is only seeking the match he only deposits 6% of his pre-tax income. To keep it a level playing field I adjusted the contributions first by 15% and then by 25% for taxation.

          The Investment Company Institute did a study and concluded that on average
          1. 401(k) plan participants investing in mutual funds tend to hold lower-cost funds
          (At year-end 2013, 401(k) plan assets totaled $4.2 trillion, with nearly 38 percent invested in equity mutual funds. In 2013, the average expense ratio for equity mutual funds offered in the United States was 1.37 percent. 401(k) plan participants who invested in equity mutual funds, however, paid an average of less than half that
          amount, 0.58 percent).

          2.The expense ratios that 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000.( In 2000, 401(k) plan participants incurred an average expense ratio of 0.77 percent for investing in equity funds. By 2013, that figure had fallen to 0.58 percent, a 25 percent decline. The expenses that 401(k) plan
          participants incurred for investing in hybrid and bond funds also fell from 2000 to 2013, by 19 percent and 21 percent, respectively).

          3. The downward trend in the expense ratios that 401(k) plan participants incur for investing in mutual funds continued in 2013 The average expense ratio that 401(k) plan participants incurred for investing in equity mutual funds fell from 0.63 percent in 2012 to 0.58 percent in 2013. The average expense ratio that 401(k) plan participants incurred for investing in hybrid funds fell from 0.60 percent in 2012 to 0.58 percent in 2013. And the average expense ratio that 401(k) plan participants incurred for investing in bond mutual funds fell from 0.50 percent in 2012 to 0.48 percent in 2013)


          Here is my model. With the assumptions I included which are detailed and viewable by anyone in excel or imgur I conclude a difference of around $435k or 60% increase over the long run for the 401k.

          I cut this out of the images and don’t want to redo the whole imgur thing.

          Salary Contributions Match Total
          Totals $199,316.54 $49,829.14 $249,145.68

          If you look at other financial calculators you will see I am more correct.

        • Brandon Hall

          Nice job on the model. There are couple a things I wanted to point out:

          First – the fundamental flaw in your model is the comparison of only one fund. You assume that every plan has access to this fund and every participant chooses to contribute 100% to this fund. This inherently limits the number of people your model applies to and helps.

          Second – you acknowledge plan and fund fees yet fail to build them into your model.

          That said, I like (and support) the approach of modeling one fund (this is one of the approaches I took when analyzing my own 401(k) historical and potential returns). If everyone did this, they would have a much clearer picture of historical and expected returns. Transparency would increase and investment decisions would become easier to make.

          But few people will delve into the details to make this comparison, and fewer will build a model around it. That’s the problem and that’s why I chose to use average 401(k) returns and average market returns. The point of the article wasn’t to say one way is right vs. the other. The point of the article was to wake readers up to the fact that their 401(k) investments may not be performing to the level they are capable of.

          I think we both have great approaches to approach the problem eclipsing 401(k) returns. My model looks at a macro level and says “hey, you may have a problem” and yours looks at a micro level and says “this fund stinks, but this one is great.”

        • I did change the returns for 401k fees. See the below quote from my comment.

          Did you read the ICI paper? Plan participants are paying less in fees versus the average investor.

          And i purposefully used the same fund. In your model you compared the “average” 401k return to the returns of the s&p 500 index. Which isnt the same.

          Hopefully tonight i can make a more generic model that just compres returns on a more macro level

          I have gotten the break even yet. But i think it will be well within any plan fees.

          But lets assume a terrible plan charges 1% in fees, even though the study I linked to says 401k participants actually pay less and they are charged 1.11% which takes the return down to 9% then they would only have about $914k or a $245,315.92 improvement over taxable. This goes down to a 37% improvement.

          I think people need to do their own due diligence on their plan. But you would have to have terrible funds in an expensive plan with a terrible match to really have a reason not to contribute . As i have shown 25% match of 6% isnt bad. I still dont agree with your model and dont understand your cost basis method. Please read the ici paper.

    • Eric Glynn

      Thank you Bennett! This article starts out strong, then really jumps off the deep end. A 401k is a powerful tool for retirement savings. Yes, you need to be smart and either self-manage or find a good target fund, but to forgo the tax savings AND a guaranteed 25% ROI is lunacy, and I can’t believe a CPA is advocating such decisions.

    • Tom Cyr

      Certainly, the Free Money bucket is the best bucket of all, BUT, 25% ROI is spread over the term of one’s employment. If one stays with that company for 10 yrs, their Free Money annual return is 2.5%, or probably negligible in the grand scheme of things.

    • Susan Maneck

      I can’t see leaving money on the table by not contributing up to the match myself, but frankly 25% is a pretty sad match if you ask me. I’ve worked for universities most of my life and I’m used to the amount I contribute being matched 100% if not more. We don’t have the option not to contribute. TIAA-CREF has got to be the most transparent and user friendly investment institution out there. As for Brandon’s statement that a 401K will only outperform the market before retirement, why would anyone leave their money there afterwards? At that point you roll it over into an IRA. As for pension plans, in my opinion the reason why pension plans were preferable is that employers contributed more to it. Now they are getting away with this measily .25. I opted out of the pension plan (PERS) and asked that my retirement contributions be put in TIAA-CREF instead. The amount contributed had to be the same and because PERS got in trouble during the Recession both individual and institutional contributions were increased. Now I get a whopping 20% going towards my retirement. And I get to manage it. One can always invest in an annuity at retirement if a pension is what one really wants. But if you do the math you’ll find out that Social Security is the best annuity/pension out there, for all the criticisms against it. That’s why I don’t intend to take my Social Security until I’m 70 when I can get the highest amount possible. In the meantime I’ll live off my rental income or take money out of my retirement mutual funds as well. And don’t forget folks, if you have any self-employment at all you can open up a self-directed 401K and use it to invest in real estate if you want. I bought three houses this way.

    • Brandon Hall

      Hey Frank, thanks for commenting. Because of the low match, it doesn’t make financial sense to invest in my employer’s 401(k). I have found that with higher matches and good investment options, it can make sense to invest in a 401(k) as long as the participant is staying on top of it.

    • Brandon Hall

      Sorry, I should have given the article pre-text. A couple weeks ago I was reading BP forum posts about 401(k)s which spurred me to take a deep dive to really understand mine and what other plans tend to offer. I found that my plan doesn’t make sense for me, but that isn’t necessarily the case with other investors.

  5. Bryan W.

    I think I fall into a rare situation but I’m definitely one of those “other investors.” My company matches 100% of my contributions (up to 6% of my salary) we can invest in Vanguard institutional index funds, which have extremely low fees. I would be insane not to take advantage.

    Now I also have zero REI experience yet, so the opportunity cost is probably lower for me than it is for others.

    • Brandon Hall

      Hey Bryan, I’m jealous! I’m sure that a 100% match drastically changes the decision making. At that point, you really only need to be concerned with annual re-balancing, taking advantage of those low cost Vanguard funds, and the vesting schedule.

    • Tom Cyr

      Great move. Just don’t get lured into overfunding your 401K past the limit of what the company matches. There are superior investments and superior tax planning alternatives. I wish I would have known them while I was still an employee.

  6. Shaun Spalding

    Great article, Brandon. There are so many facets to cover with this topic, it’s difficult to do. But, I like that it spurs conversation.

    I agree with Karen R’s comments as the 401k should be used as a means of reducing your taxable income, if you can, and not be relied upon for retirement alone. Just the maximum contribution limits alone should tell people that you cannot accumulate enough to retire on that moneyt without other sources.

    I agree that real estate is a great means for a good ROI. But, don’t forget Roth IRAs and backdoor Roths that can allow your retirement contributions to grow and be withdrawn tax-free without a minimum withdrawal based on your age. Even willed to your heirs. Sometimes, with your employers consent, your 401k can be converted to a Roth with a tax payment of course.

    I remember reading a book, I think ‘The Millionaire Next Door’ that asked net asset millionaires what their definition of risk was and they said: having only one source of income.

    I liked that.

  7. Ronald Perich

    A match, as you proved, doesn’t mean you will be better off. Who is the world seriously thinks $767,000 is a lot of money to live off of for the rest of your life? And if you are just starting today, who thinks the buying power of $768,000 today is going to be the same 30 years from now? It’s not. In fact, you’ll need $1,864,000 thirty years from now to have equivalent buying power at 3% inflation.

    Still, I like 401(k) contributions for most people… even though I don’t think they are a very good way to grow your wealth.

    Why? Because unlike you Brandon, most people do not do the math, they do not have discipline, and they do not understand how wealth is accumulated. So a 401(k) is their best shot at accumulating some money for retirement. I would rather them have something than nothing.

    But for those who are willing to take a very active role in their investments, they shouldn’t allow themselves to get suckered into the match as being free money. It’s costing you.

    See for yourselves at

    This shows how 30 years of investing $417/month outside of your 401(k) will help you generate $100K of yearly income after 26 years by simply buying fourplexes and cash flowing each door at a starting rate of $100/mo. At thirty years, you could be generating over $210K per year. The caveat? You have to reinvest every dollar of cash flow for those thirty years (just like you would do in a 401(k))

    • Brandon Hall

      I was hoping you’d read and comment Ron! I agree that a 401(k) is better than nothing, I just wanted to present it in a way that makes people think about where there money is going. My hope is that readers will look at their own 401(k)s and try to determine what their money must earn in order to make it worthwhile to continue utilizing the investment vehicle.

      Thanks for posting a link to your file. Nicely done!

  8. Your assumptions are totally flawed and extremely misleading. If I have access to a low cost index fund in my 401k or the non-taxable account I would get the same return. This is a hit piece on 401ks that is misinformed. If I have a total stock market fund that does a decent job of tracking the stock market you should expect to get somewhere around the market return. You are arbitrarily choosing to lower the returns of 401k plans by almost 4%. This is insane. Also you should add in a comparison of actual investor time weighted vs fund returns.

    Maybe one of the reasons that returns are so low is that for some 401k plans the default investment was a money market. Now plans are transition to more use of target date funds which will lower rebalancing, BECAUSE the target date fund does the rebalancing for you. And you are not taking into account that some individuals in a 401k may want more fixed income products to have less risk.

    In addition with your average 401k balances comment you have to consider that people will move jobs during their working career. Let’s assume someone graduates college at 22 then works until they retire at 65. That is 43 years of working various jobs.

    The average person born in the latter years of the baby boom (1957-1964) held 11.7 jobs from age 18 to age 48, according to the U.S. Bureau of Labor Statistics. Nearly half of these jobs were held from ages 18 to 24/

    So lets assume 7 jobs which is on the low end in those 43 years that is 7 different 401ks. A better measure of balances is is aggregating all 401k balances an individual has. This would provide a more favorable view of 401ks.

    In conclusion the investment product is fine, people don’t use it rationally or optimally. And your comparison are not equal and biased towards proving your point. Even if you don’t get a great match its better than nothing. You are leaving 25% of 6% on the table. That is free money available to you. It’s not amazing but still free.

    • Brandon Hall

      Kyle, with any sort of modeling, assumptions need to be made. My assumptions may be flawed, but I attempted to back them up with facts, research, and studies. Additionally, I provided a link to my model so that you can model your own scenario – I fail to see how that can be misleading.

      The article isn’t misinformed, I am just laying out facts and demonstrating one (of many) scenario. Reducing the 401(k) returns by 4% wasn’t done “arbitrarily” as you claim. In fact, you should look up the following congressional testimony: “Phyllis Borzi, Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA), had this to say in recent testimony to Congress: From 1998 to 2007, the average annual returns for IRAs were 4.5 percent, compared with 5.4 percent for 401ks. IRA holders often pay fees that can be two to three times higher than the fees paid by employee benefit plan participants.”

      You won’t get what you could get in the market, even with index funds because there ARE fees involved, no matter how minuscule.

      Target date funds do auto-rebalance, so I’ll award you a point there. But they also contain investment holdings that young people should generally avoid, such as bonds. Why would a 20-something need fixed income? They don’t, and those that hold fixed income are substantially hurting their potential returns.

      I’m bummed you think my article is biased and that I was trying to prove some point because it tells me you didn’t actually read the entire article. If you did, you’d realize I simply laid out quants. I even went as far as showing people what they’d have to earn in their 401(k)s in order to “break-even” and make it all a non-issue. I don’t see how that is biased, I see that as informing readers. That break-even percentage rate, according to the scenario I presented, was 7.72%. Additionally, I essentially ENDED the article with a question about how you think YOU can perform: “This means that the answer to the “should I invest in my 401(k) or not” question comes in the form of another question: Will your money earn at least 7.72% annually in your 401(k), and if not, will you invest your post-tax foregone contribution, and will that money earn 9.84% annually?”

      I never imposed my views, I showed readers how they can make an informed decision (hint: they have to find the 401(k) break-even annual return). Sure, I tell people what I personally do, but that wasn’t in an attempt to sway public opinion. I won’t benefit if people use or don’t use their 401(k)s, so what do I have to gain from convincing people one way or the other?

      The decisions to not take the 25% match isn’t “leaving money on the table” as you claim it to be. Trust me, I’ve run countless scenarios and tried to make it work. I can’t justify sacrificing higher returns on my post-tax money over a period of 30-50 years for a small 25% match.

      Perhaps you should give it another read. Thanks!

      • Brandon,

        Thanks for responding. I don’t think you read my whole comment and still have some confusion.

        I understand what your model is saying and how it works. I see the studies you linked to I just don’t think that that the comparison is accurate or fair. My issue still remains with the 9.84% return on non-taxable money. I read your source and saw that you selected the the long term market S&P 500 Index Return from 1965-2014. However, this is in an invalid comparison. There is no tax considerations or asset allocation considerations. If you were comparing a 401K where 100% was invested in a large cap blend US Stock fund and the returns were almost 4% off that would be noteworthy. But people investing in 401ks have different asset allocations, if im a preretiree with 50% in stocks and 50% in bonds I want to compare to a more accurate benchmark. My other problem is that you don’t give a yardstick of actual investor returns in the non-taxable space. In this Morningstar article the average investor costs himself about 2.49% by timing compared to actual market returns. That is my problem with your model. I understand you can’t include every single scenario but your comparison is not valid.

        In addition the quote you included in my opinion harms your point. 401k holders are doing better than IRA accounts. An IRA can be with any low cost provider such as Fidelity, Vanguard, TIAA-CREF but people still buy expensive class A shares from American Funds for no reason. The 401k returns are better than the IRA ones and 401k participants are paying less in fees.

        This is a direct quote from you, “You won’t get what you could get in the market, even with index funds because there ARE fees involved, no matter how minuscule.” Then you compare 401k funds, which include fees versus the long term S&P 500 return from 1965-2014 as a comparison.

        I did read your article and I still think it is biased. In the comment above me a guy called a 401k a fraud and said employer matching is a trick? How is it a trick?

        I still take issue with this quote, “The decisions to not take the 25% match isn’t “leaving money on the table” as you claim it to be. Trust me, I’ve run countless scenarios and tried to make it work. I can’t justify sacrificing higher returns on my post-tax money over a period of 30-50 years for a small 25% match.”

        Are you basing this decision upon this model? What other scenarios did you run? The 25% match is still free money. The 401k is tax advantaged.

        I have some more critiques below:

        In the Fidelity link you included about having 8 times your salary saved by retirement, I believe that would be across your total portfolio not just your employer plan. And you never addressed the issue I raised of aggregating 401k balances.

        Target date funds are a good idea for investors because they automatically lower the exposure to equities along a glide path. Almost every financial planner or author realizes there is a need for fixed income in pretty much every portfolio. It shouldn’t be that high for a young individual but definitely should be down the road.

        I appreciate you are trying to educate people and create a discussion but there are serious fundamental flaws. The portfolio charts tool is a nice thing for users and gives a model for different asset allocations.

        People use the 401k incorrectly, and the ERISA regulations don’t do enough for investors, but you can stash a ton of money tax free and let if grow. I am very luck that my employer matches 100% up to 4$ and deposits 10% every quarter in for me. I also have extremely low cost investments available.

        • Michael L.

          Brandon, I have to agree with Kyle here. My 401k offers Vanguard’s funds which track major indices like the S&P and charge less than 0.1% in fees.

          If anything, statistically speaking, the average investor would do much better in their 401k because they won’t meddle with the money and manage it poorly. This is what the average person will do, and will see 0-2% actual returns on their personal portfolio.

    • Todd Goedeke on

      Kyle, I agree with the facts you stated.

      In addition I want to know where someone gets 25% cash flow from their RE year after year to equal a 25% employer match. For that matter historical figures for RE investing are a lot less than a return of 25%.

      Smart money allows for borrowing from a 401k and using proceeds to buy RE or rolling over 401k to self directed IRA or Solo 401k when leaving an employer.

      A balanced portfolio does not mean 100% in RE spread over different properties.

      It’s wise to let investment professionals comment on investments outside the RE world for an honest,unbiased article.

  9. Christopher Wyatt

    The 401(k) is a fraud. Employer matching is a simple trick to get your money under contol which in turn puts you under more control. It gets worse when there is a “vesting” schedule to truly call it yours. There is no element of control for monies in a 401(k). I stopped contributing 4 years ago after comparing realestate gains vs 401(k) gains (or losses). RE has better tax benefits. RE cashflows every month to me to cover my bills. RE makes higher returns time after time after time. There should be a study to show with hard data how many people RE has “retired” vs how many a 401(k) has retired.

  10. Thomas F.

    I do not have a company 401k but I do have a Roth Thrift Savings Plan with the government and a 100% match up to 5%. I have seen several articles on this site about how 401k plans are often a poor or at least mediocre investment choice. I was wondering what your opinion was on Thrift Savings Plans?

    I have done some research but I do not have the level of knowledge to poke holes and find flaws in the numbers companies put out. Here is a website with information on the TSP program, does this check out to you?

    • Jeff Bridges

      The TSP is a 401k plan operated by the federal government. These accounts don’t differ from those from the private sector in any way with regard to their tax advantages. TSP also separately offers you to setup an optional Roth IRA and contribute to that but there is no match for that account by your employer (you make post-tax contributions into this account and they grow tax free). Gov matches 5% in your TSP account, which is excellent free money. Many of the TSP target date accounts have very low expense ratios relative to the industry and therefore are very good values. I don’t think a separate comparison is needed; just interchange 401k and TSP for your evaluation of the article.

      • Thomas F.

        Thanks for the response. The Roth TSP seems great on the surface because of how the money can grow tax free but I am still new to this game.

        Unless I am wrong I think part of your information might be out of date. The government now offers a full Roth TSP that has full matching. 5% contribution for me is about $80 and the government matches all of it. I know the government used to only offer regular TSP accounts with no Roth option,(my dad wishes they had Roth back in his day).

  11. Misa Kataoka

    I “opt in” 401(k) with 1) any matched contribution and 2) any low cost index fund.

    401(k) is an option for employees to passively participate to the equity market, while REI would actively participate in specific properties and locations with your time and energy.

    Stock market is measurable per share price, while your own REI return is your very own, unique result. Like anything else, I would diversify – I opt in to pay forward to “future me” when REI and everything else does not pan out. I did rollover 401(k) to my IRA upon exit interview, keep all in one in low cost brokerage.

    I am not a pro, so I keep it simple. I can’t leave free money on the table, but I do not stuck my job just because my 401(k) match will be fully vested in 7 years! Investing style has to make sense to you, regardless.

  12. Gene D.

    Its impossible to track expected returns from real estate on an individual basis while comparing to average return for all participants in a 401k nationwide.

    A savvy 401k investor can rebalance from growth to value to domestic to international to fixed income and on and on, similar to what a savvy real estate investor can do to build wealth from real estate by using leverage, redeploying capital into new properties, etc. This in theory can bring an annual return well north of 20%

    This is a very lofty assumption, as in most cases the general public grow their net worth through buy and hold and not due to having expertice in any type of investing.

    To use an inverse example, someone may be very good at stock selection due to some particular expertise in a subsector, ie medical researcher that understands how new drugs come to market and being able to capitalize on those opportunities, similarly to how a flipper may be good at estimating repair costs and forecasting what ARV may be.

    This individual can then assume that his/her use of resources is much better served by investing in biotech and quote a study that shows real estate returns nationwide over the last 100 years are essentially flat when you remove inflation, repair costs, transactional costs, etc.

    Both individuals will be correct in investing in an area that will yield best results for the, but incorrect in drawing a conclusion that others without this special expertise should do the same.

    All this being equal, an individual will do much better by purchasing a well diversified inde fund and reinvesting the dividends as opposed to holding on to a property. This has been proven by countless models and running historical analysis across multiple cycles. When you add a company match and tax shelter offered by a 401k, this becomes beyond debatable. Notice, i said “all things being equal”. I dont doubt for a second that someone dedicated, similarly to @BRANDON HALL can potentially do better.

  13. David Faulkner

    On the question of “Should I invest in a 401k or Real Estate?” my answer is: YES! I contribute to my Roth 401k up to my employer’s match. I also set up a self directed Roth IRA LLC with checkbook control, contribute $11k/yr for my wife and me, and every time I switch jobs I roll the 401k funds into my LLC and buy Real Estate with it. Have cake, and eat it too … tax free rental income is a great thing!

    • Would you talk about this more in depth? This is a very interesting plan. I currently have a similar interest but am not taking advantage of it like that. I would be interested in hearing more on how its done.

  14. John R.

    I would be interested to hear you further develop your thoughts from the last paragraph, regarding solo 401-K.
    You concluded that 401-K did not make sense, but then seem to flip in the high contribution situation where there is NO employer match. I’m in this position. There is no match, but these are dollars off the top of my income, and would be taxed at 50% if I took them as income now.

    @David Faulkner, I’m investigating the self directed route. I just learned about it via BP recently and find it very intriguing.


    • Brandon Hall

      Hey John, thanks for reading and asking a question. So the Solo-401(k)s are much more powerful, in my opinion, than employer offered 401(k)s. The first reason for this is that you will have the freedom to choose a plan provider, essentially allowing you the option to pick what funds your 401(k) is able to choose to invest from, and as a result, you can get quality funds cheaply.

      The second reason is you can sock away $53k into your 401(k) for 2015. This means that solo-401(k)s are an extremely effective tax tool as you can basically control your annual taxable income and save a ton of money while doing so.

      Hope this helped!

    • Dmitriy Fomichenko

      First I want to thank Brandon for great article and detailed explanation, nice job as always!

      John, since Solo 401k plans is something that I deal with on daily basis I thought of giving my two cents on this subject:

      First, Solo 401k plans are not for everyone. You can get one setup only if you are self-employed or own a business without any full-time employees other than the owners and spouses of the owners.

      Second, not all Solo 401k plans are the same. You can go to Fidelity for example and use them to establish the plan but it will have many limitations. The most important limitation will be investment choices. With Fidelity (or any other major financial institution) your investment choices will be limited to the investments the firm offers – that is how they make money. Some of the other features may not be available also such as the ability to contribute post tax into Roth 401k, or loan feature which give you the ability to borrow from your account up to $50K.

      If you want to be in the ‘driver’s seat’ of your 401k then you need a truly self-directed plan. In this case you act as a plan administrator and need for a custodian or third party administrator is eliminated. Your 401k plan comes with the trust which is used as a vehicle to hold assets of the plan and you are a designated trustee. This gives you total control to select any investment for your 401k legally allowed by the IRS (this means you have virtually unlimited investment choices) and can invest your 401k plan assets into non-traditional assets such as real estate, tax liens, private business, private placements, or simply use your 401k as a bank and be the private lender to others, etc, etc.

      This option like Brandon said is not only serves you as great tax-shelter (if you and your spouse work in the same business you can potentially shelter over $100K from taxes combined), but it also allows you to be in control of your retirement nest egg and invest into assets that you understand and have much greater control.

  15. Scott Trench

    Well done sir. I have been extremely interested in the 401(k) for several years now. I love your model, and as is the case with any good model, I will merely challenge one key input/assumption:

    You argue that investors are likely to experience far lower returns with most 401(k) options. That’s true, but most 401(k) plans have at least one low-cost option. My 401(k) through Fidelity, for example, has a very low-cost index fund, and I simply put all of my 401(k) contributions there. No, I don’t rebalance, because I ‘m a big believer in stock investing and don’t fear large volatility over the long-term, simply because I believe in historical averages over long time periods, and hope to have additional sources of retirement income. If you are sophisticated in any sense, or simply know to buy low-cost passive index funds, then I’d be surprised if you performed significantly worse through the 401(k) than through a regular taxed brokerage account.

    I’d also like to point out that it is possible to use self-directed plans and roll-over 401(k) balances. This is important both because it allows you to invest without those big fees you mentioned, AND it removes the opportunity cost of investing in a retirement account with limited options. Self-Directed Plans allow you invest in pretty much anything you might want to invest in outside of a plan. That’s a blossoming industry right now, and for good reason – as you indicate in your article, a ton of American wealth is locked up in poorly performing 401(k) plans currently.

    Americans who want to invest in real estate today typically have wealth in only 2 places – equity in their primary residence and contributions to their retirement plans. I expect to see Self-Directed IRAs to really take off over the next few decades. That should make packing as much as possible into the 401(k) early on more appealing (because you’ll be able to play with more $$ when you roll it over into a self-directed account).

    I loved this article, the model, and the discussion.

    • Brandon Hall

      Hey Scott, thanks for reading and commenting. If you have low cost index funds offered through your 401(k) plan, then it may very well make sense to fully utilize the 401(k) vehicle. These are the types of things I was hoping my article will make people look for.


  16. Jerry W.

    I have a self directed individual retirement account the state has set up for government employees. The state has a staff of people who keep up on the available companies you can invest with and kick some out if they are not performing well. I know almost nothing about investing. The only smart thing I did was keep putting in when the market was bad a few years ago. Sometimes my total amount invested would drop even after putting money in. My wife wanted me to stop it, but my reasoning was you buy low so you can sell high. When the market came back I did pretty good. I am actively investing in real estate, and hope to get the majority of my retirement from it, but want my wife to have the safety of my retirement fund in stocks available in case something happens to me. She would not be able to hands on manage the rental business like I do where I replace a roof by my own labor. Thanks for taking the time to write even if I did not understand the premises of all of it.

    • Brandon Hall

      Hey Jerry – great stuff. Automatic, continuous contributions is a big plus for retirement accounts as, like you said, you will be buying more every couple of weeks even when the market has bottomed. It takes the emotional aspect completely out of it.

  17. Tim Hammer


    Thanks for the article. Anyone can throw stones or find flaws in a scenario based model that is condensed to a one page article with a couple links. There are, after all, endless possible avenues and rabbit holes for which a real life scenario can, and will, play out.

    That being said, the point of your article hits a homerun for the average reader as it brings out real facts that illuminate the historical and statistical reality of the 401k route. History is still the best teacher. The 401k’s history is sadly telling for the average contributor. The facts paint the picture.

    Kyle Cook did make some very good points though, and it is a great vehicle if wielded properly. Timed plans, as well as low cost index funds, are attempts or ways to do this. However this still takes a lot of control out of investors’ hands. You don’t put a toddler behind the wheel of a 747 (does a 747 have a wheel?) and expect to arrive at a desired destination. Even with a theoretical understanding of how things work and a go-to-guy at the tower to talk and walk him through at best, and check in on him once in awhile at worst, there still would be a tragic margin of error. This article tells people to stop pretending. We all want to fix it and forget it. This is not reality and the diamond encrusted 401k has been unleashed upon the masses with this unintended consequence or assumption or whatever you want to call it. It’s probably not a conspiracy, but it’ll sadly and surely feel like it was to many disappointed assuming fans.

    That’s why I’m a fan of real estate. It’s The Donald among politicians of investing. Though not without a few scary flaws, it just feels like the more honest and understandable approach. Diversification has merits, but you’d better understand the responsibilities that go along with any investment choice. Some avenues are more well lit and this makes it more apparent that you’re off course.

    Getting the average contributor thinking about how their money is being invested through using simple layman termed articles is just what needs to increase in order to help improve the lives of prudent, but uninformed, Americans. An uneducated contributor is tantamount to an uniformed voter. Your stats and paraphrase of Phyllis Borzi in your follow up point out that this is the status quo. The key takeaway should be: Please attempt to know what you are doing with your money. Thanks again.

  18. Curt Smith

    It’s little known, that solo-401k has MANY advantages over the SD-IRA. No custodian, if you are audited the blow up potential of un permitted transactions in a solo 401k is much smaller than in SD-IRA.

    Just the removal of the SD-IRA custodian, even ignoring the annual fees of managing our 12 rentals in our SD-IRA, we are running from SD-IRAs and re-titling houses into a solo-401k.

    Check book control. Your own trust/bank account for the 401k. OMG I am so sick of trying to get contractors to take being paid with an out of state check drawn on some Ohio bank. It’s pure missery managing rehabs and rentals under an SD-IRA custodian.

    Best of all, you do not need an “entity” to hang a solo-401k off. If you manage your own cash rentals, you have the right to setup a solo 401k just be cause you are running a business for profit, with or without an entity.

    Just google solo 401k, check book control etc. We are dumping our SD-IRA as fast as we can and going solo 401k for all our tax defered real estate.

  19. shane Shepherd

    Thanks for the post Brandon, interesting topic and good structure to answer the question. Unfortunately the entire driver in your model here is the difference in the return assumptions between the 401(k) and stock market index fund. And that is because the 401(k) will contain a mix of stocks, bonds, and cash and is therefore much lower risk. What if I put my 401(k) into all stock? Then you have an apples-to-apples comparison. Otherwise the only takeaway from your extensive analysis is “if you invest in 100% stocks, you would have done better than a mixture of stocks and bonds and cash”. Which has nothing to do with 401(k)s.

    • Brandon Hall

      Hey Shane, good points! I take the stance that even you had the ability to invest in a low cost index fund (all equities), you’d still not receive the same return as there are plan fees involved, no matter how small.

      But you do bring up a good point – if you are invested solely in equities, the returns will likely be around the same, assuming your 401(k) plan provides you with choices allowing you to produce a market return.

      • The return may be different with plan fees but not by almost 4 %. This is an unfair comparison. You are also neglecting the fact that some 401k plans offer access to institutional shares which can be even cheaper. There are bad 401ks but they will not take 3.84% of your return.

        Compare the same fund in a taxable or 401k account and the returns will be almost identical. Your model is flawed because you are not comparing the same thing.

  20. Jiri Vetyska

    I see you have discovered the best approach, but didn’t really notice it.
    Invest in 401k while you are employed to get access to the employer match, and when you retire, rollover to IRA and invest any other way you would invest, without the limited choices and fees. That will get you the best of both worlds, and in my mind, there is no point in keeping 401k if you are not employed.

    Somebody else mentioned, we should consider other investments, such as RE. While that comparison may be hard to come up with, there is one advantage that 401k provides – taking a loan – you don’t pay any interest to a bank, only to yourself. Which means it’s available money when you need it, and banks don’t count this loan toward your DTI, because it’s technically your money.

  21. Brandon Ingegneri

    Brandon. In my primary profession, we do not have 401k’s available to us. Rather, we have a defined benefit pension upon retirement that we pay a percentage into and the option to put into a 457 Deferred Compensation Plan which I do. In relation to your blog about 401k’s what are your thoughts on contributing to the 457, and is my money better utilized being invested in real estate considering there is no, “Match” from my employer?

  22. Brett S.

    Wow. It scares me that people come to you for advice if this is what you’re giving out. You can’t make such broad statements.

    Many 401k plans offer reasonable fees and a decent selection of funds. For these The return of the market equals the return of the 401k which is the crux of your article. Therefore, for the less savvy folks they’re losing free money and signing up for taxes.

    Heck my 401k plan has lower fees than standard vanguard (comparable to $100m institutional class shares).

    A better way to write the article would be to compare the tax benefit of a 401k in terms of market % points and then give advice such as “if your 401k fees are x then your match needs to be y before you invest” or something like that.

    • Brandon Hall

      Hey Brett, thanks for reading and commenting. If you review the article, you’ll see that I never actually offered advice. Sure, I told people what I do, but I concluded my analysis with a question which solidified my non-biased position:
      “This means that the answer to the “should I invest in my 401(k) or not” question comes in the form of another question: Will your money earn at least 7.72% annually in your 401(k), and if not, will you invest your post-tax foregone contribution, and will that money earn 9.84% annually?”

      When a client comes to me for this type of help, we will sit down and do an in depth analysis/study of their 401k performance and potential performance measured against the tax benefits received. In this post, I provided readers with one part of that analysis. It’s too broad an analysis to apply to anyone, which is again why I never actually offered advice.

      I don’t have a problem with 401ks. There are times where they make a lot of sense and there are times they don’t. I want my clients to make smart and informed financial decisions and I help them reach conclusions on their own in a non-biased manner.

  23. Brandon,
    Thank you for daring to consider other options besides the ones the financial industry tells us are “smart”. I appreciate you being willing to think outside the box. Sorry so many other commenters are threatened by this.
    Another reason to rethink whether a 401k is the right decision for each individual is whether they plan to retire prior to age 59 1/2. For early retirees, you will forfeit some of your money to the penalty if you want to access it before traditional retirement age. I would love to cash mine out, pay the remaining balance on my apartment complex mortgage, and retire tomorrow. However, I am not permitted to take it out even if am willing to pay the penalty according to my plan advisor. Apparently, the rules for a 403b prohibit touching the money prior to that age unless you are terminated.

  24. Jeff Brown

    Dalbar Corp. has done a 20 year look-back on the annual yield for Americans in employer sponsored 401k accounts for a long time. This year for kicks, they also did a 30 year look-back, ending in 2014. That number was a depressing 3.79% annual return for the typical American.

    My experience talking with folks daily is that their 401k balance at work concerns them in a big way. They’re leaving them left ‘n right for better approaches.

      • Skyler Massey

        I’m not necessarily against 401(k)s, but I am against people investing without knowing what they’re getting into. Here are a couple facts I came across that I found interesting:

        -67% of those enrolled in a 401(k) plan think there aren’t any fees
        -In Robert Hiltonsmith’s report The Retirement Savings Drain: The Hidden & Excessive Costs of 401(k)s, he calculated that over a lifetime, 33% of our investment returns our eaten in fees
        -According to Watson Towers, a worldwide consulting firm, about 90% of 401(k) plans require pay-to-play fees in exchange for placing a mutual fund on a plan’s list of available options for employees to choose from. Obviously, this limits investment options and boosts fees for investors
        – Most folks rely solely on a 401(k) for retirement. Bad news–the average person that contributes to a 401(k) only contributes 3.1% of their income. If this is their sole investment vehicle, contributing only 3.1% won’t give them much at retirement

        Here’s the guide I use to help others decide what to do with their plan:

  25. Ann Coleman

    Good article Brandon. I do wish you had addressed the annual returns issue a bit more, though. You laid out part of the problem — people “invest and forget” or, worse pick bad investments or fail to checkout the expenses ratios– so the annual returns are abysmal. It complely defeats the purpose of retirement investing, and it is a terrible shame and scandel.

    But the issue isn’t that your are investing through a 401k (given that you don’t want all your eggs in real estate). There is a a very simple fix for for those poor returns : index funds. Almost every 401K will offer several broad market index funds (which should be the lowest expense funds, as well). Anyone who isn’t “beating the market” should simply “join” it. This also applies to anyone who is new to investing. Even if you think you can beat the market, you would be well advised to put most of your money in an index fund and test your luck with a small percentage of your account. If you can beat the market consistently for several years running — and you understand exactly what it was that you did right — then you can take over investing decisions for the rest of your portfolio. But considering that most professional money managers can’t beat the market (which is why so many people have those abysmal returns in the first place, plus we pay them for the service of losing us money), trying to do that on your own is just dumb unless you are willing to put in a lot of time and effort and studying.

    The 401K statistics are scarey and sad. Investment advisors and money managers are not your friends They are in business to make money, and the industry is set up so that they make money off your account even when their decisions cause you to lose money. And you should define losing money as any return lower than the market, since anyone can equal (or come very close to) market returns with a simple, low expense, index fund.

  26. Jacob Pereira

    Hi Brandon,
    I commend you on a well thought out post with actual numbers presented to back up your assertions rather than the “five must do…” or “three easy steps…” buzzfeed-esque articles that seem to be cluttering up this site lately.

    However, I think you should be very careful with the advice you’re giving here. You’re essentially advocating not taking a 25% return on investment with zero risk. It could be argued that there’s an opportunity cost of the money you’re investing, but only above the returns you’re gaining from your stock appreciation, dividends, or whatever other vehicle you’ve chosen. Also, your time is valuable; I would take 7% of purely passive returns vs 9% returns on time-consuming hard work any day of the week. I took a brief glance at your model, and there are a few assumptions you made which I didn’t have the time (or inclination) to fully research, but I can’t imagine a valid argument to not take a 25% match. I’ve been blessed with a 100% match on the first 6% at my W-2 job, but i wouldn’t throw away 25% either.

    Again, I commend you for putting your position out there and really showing the numbers. There are very few BiggerPockets bloggers who are willing to do that, and I hope you don’t get too much criticism for it. Please continue you take risks with your posts. This is where the best and most informative debates come from.

    • Brandon Hall

      Hey Jacob – thanks a ton for your comment and support. I’m jealous that you are receiving a 100% match! I agree that opportunity costs need to be weighed (and also against your time). I appreciate the well thought out comment.

  27. matt s

    Good article with a lot of detail, some of which makes my brain hurt.

    If it’s complicated and difficult to understand that is probably a red flag and you should proceed with caution. 401ks sound great on surface but consider the following:
    1. timeframe invested
    2. Returns. If you can get 8% returns in stock market you are doing good.
    3. Limited find choices
    4. Fees
    5. Dependent on corporate financial health.
    6. Borrow your own money with interest and tax exposure.

    Only benefit I see to a 401k is it lessens my annual tax exposure. Therefore I’m forced into paltry gains with a so so company match.

    Ever wonder why Wall Street is so wealthy. It’s because we Americans are duped into believing these golden handcuff investing programs are the way to wealth.

  28. Pete Lee

    Hi Brandon, if I want to find out if another form of investment (other than stock market) earns better than 401K, let’s say if we can get our 401K to earn close to 9.84% annually (say if we just pick a low cost index fund in 401K which mimics the broad market), in your model, how much does the other form of investment need to earn annually to beat the 401K option at the end of 50 years?

  29. Interesting analysis and discussion. I started participating in 401k’s in my 20’s, but over the years I noticed that I was not able to accumulate as much as I thought I would, and the returns were disappointing. I witnessed two major stock market crashes. During one of those periods, I was laid off and lost the unvested match portion of my 401k. I started seriously questioning how these kinds of accounts are helping me achieve my goals last year.

    I decided to invest in real estate and most of my capital was in my IRA’s, some of which was rolled over from past 401k’s. I liquidated most of my retirement accounts to invest in two apartment syndications. I plan to dump the rest out this year to pay the taxes and maybe have a little left over to do another deal.

    I recently started a new job that offers a generous 401k match, but I’m probably not going to take it. Although, it is tempting…

    As someone who wants to retire well before the age of 60, can someone explain why would I want to tie up my investment capital in an account that doesn’t pay me any income and which is heavily taxed/penalized if I need access to the money?

    I don’t think it would take more than 10 houses to pay my basic living expenses, or a few good value-add deals that multiply my investment capital. Then, I have income streams that are tax-free and replace my earned income. That’s the definition of “retirement.”

    The alternative is to continue to work until I’m 60 and save up a pile of money large enough in a 401k that I hopefully don’t outlive.

    I think there is much more to this discussion than financial returns. 401k’s come with onerous restrictions that limit liquidity and investment opportunities. Those have to be considered in addition to the simple ROI calculation that others bring up when it comes to matches.

  30. Mark Lucido

    Brandon –
    Excellent article and superb analysis with citations! I have heard a lot recently about this exact topic on many podcasts (Rich Dad podcast comes to mind). What I haven’t heard as a consideration though is how a 401(k)/IRA can serve as a wealth transfer vehicle to avoid probate. Recently my parents died and named their grandchildren as beneficiaries of their IRAs so that their wealth could last for generations. By doing this, the grandchildren were subject to the MRDs however it was calculated at the grandchild’s age. So if a 5-year old was a beneficiary, that IRA could last their lifetime in essence. More importantly though I also discovered that the value of these inherited IRAs are not included as part of the Lifetime Exclusion Amount. Since I’m hoping and planning to be immensely wealthy from Real Esate, for me, my 401(k) and IRAs are part of my estate planning tools. For others they should check with their CPAs, Attorneys and Wealth Planners. I understand though that your analysis was based on the typical scenario so this may be irrelevant. Great post though none the less!

  31. Brandon Phillips

    I max out my 401K to take advantage of the huge tax savings ($18,000 X .25 = $4,500) and my employer gives me a 6% match. I invest the tax savings and i also borrow money from the 401K to use towards down payments on rental properties. The only downside is if I ever get fired or quit my job I will need to pay back the borrowed 401K money. Just make sure you have the funds to make this work.

  32. Heather Horton

    Interesting article, however I think you are a bit off base on a couple things.

    1. You are lumping 401(k)’s into one bucket and calling them a “vehicle.” A 401(k) is simply the account type. Your performance depends 100% on what you invest in within that account (stocks, bonds, mutual funds, index funds, etc.). You are comparing a lower-cost index fund in the outside account, but couldn’t someone also invest in a low-cost index fund inside of their 401(k)? Yes, they can.

    2. I think you’re really missing the point on the employer match. That is extra money that your employer is paying you each year. By forgoing that, you are certainly losing out on “free” money that could be growing of your inside of your 401(k).

    I am all about diversifying your savings in different ways (I have 401k, real estate, Roth IRA, and non-retirement savings), however, I think it’s important to at least contribute enough to your 401(k) to get the employer match. I’m afraid you are misleading people in this article.

    If it is the investment options within your 401k you are concerned about, you should talk to your employer about improving the investment options available to you. They should be very interested in that as that is grounds for a lawsuit if they do not uphold their fiduciary duty of providing you with good investment choices at a low cost.

    • Whitney Tutt

      I’ve been reading different articles lately on why you shouldn’t invest in a 401(k) but as you stated, my employer offers a 100% match. I would hate to forego free money. Therefore, as long as I stay employed with them, I believe I’ll keep the 401(k) because it’s been beneficial thus far.

  33. Lisa Widdowson

    This article does a good job of pointing out the high fees that can come with a 401k, which is great but it ignores several other factors that do make a 401k a better option. The first benefit is taxes. If your employer offers a ROTH 401k option (which most do who offer a 401k) then you can contribute up to $18,000 a year that will never be taxed again. If you put that money in the market, you’re going to be paying 20% (minimum) on all capital gains/ losses and ordinary income rates on dividends and interest. This is a huge benefit (especially for high income earners) as taxes are likely to increase. Also even on a traditional 401k your money grows tax free, which will result in higher balances until retirement. At the point of retirement you have a lot of options including rolling it to a IRA or ROTH IRA and you can manage your tax position with other assets as well. The second benefit of the 401k is administrative. With a 401k you have the ability to make it automatic and your employer does most of the work for you. Most people can’t even save a few thousand dollars a year on their own so making the process automatic is the best way to make it happen. It is true that you could set up something on your own but most people wouldn’t. Along the same lines, most people have no idea what to invest in. The article makes it sound like it’s so easy to figure out which low cost fund(s) to invest in but most people are paralyzed by the endless options and therefore do nothing instead of making a decision. Also, there is the company match to consider. Even if the company is only contributing 3% and the high fees are more than 1%, you’re still making that 2% spread. Articles like this worry me b/c people read them without the full picture and take actions that may or may not be right for them. If you’re going to write an article like this, you should present all the facts and circumstances that could change the analysis.

    • Brandon Hall

      Hi Lisa – great comments here! A ROTH Option is one that I can definitely get behind. I also like 401(k)s for business owners as they can contribute $54k per year.

      What I don’t like is everyone blindly contributing to a 401(k). You are obviously not blindly contributing as you have a well thought out analysis, but many lock up their money without every thinking through potential repercussions. To me, that’s terrifying.

  34. James Free

    I appreciate the re-posting of this article. I recently stopped contributing to my 401(k), foregoing a 50% match on up to 6% of my income. While it certainly looks like a bad decision in the short term, I have deduced that I can get a lot more in the long term by putting extra money in my pocket and investing in real estate now, rather than leaving it in an account that will average under 10% for the next 30 years. A self-directed account invested in real estate is another option, but I don’t need the hassle of keeping retirement and non-retirement funds separate and trying to avoid legal faux pas.

    I’ll take my money now, and invest it in my real estate education!

    • Do you plan to stay in this job for 30 years? Why not make the contribution, take the match, then roll into a self directed IRA when you change jobs, or take a loan against the 401K and invest in RE?

      Even taking a taxable distribution and paying the 10% penalty, you should be better off having the +50% match, than just starting with after tax take home pay.

      But there are many ways to take a distribution and avoid the 10% penalty. My wife is a half time student, so I can withdraw from an IRA and use her “living expenses” as a student as a valid exception to the early distribution rule.

  35. John Wielgolinski

    Old article… What I couldn’t find in the comments is why are the growth rates different? 6% assumed in the tax deferred option and 10% in the after tax option? Why? What is the justification? That the investment options would be different? Seems that the risk of loss would be greater too.

    Sorry, but always go after the free money. Maybe nothing more, but get the free money.

    • Brandon Hall

      Growth rates differ because that’s real life. I’ve never seen a client’s 401(k) outperform alternative stock or real estate investments, most of which a 401(k) does not have access to. Thus the lower (albeit safer) return.

      Money is never free. I cringe when I hear people say that.

  36. Tom Cyr

    Great article Brandon. Very thorough and well thought out. I like the calculations. You point out some practical math reasons why 401K may not do everything an employee thinks it will. in 2015, the median balance in 401K’s was $18,433. Not likely to pay for much retirement activities.

    Plus, required minimum distributions and a future tax rate that will certainly be higher than it is today add up to 401K’s being the government’s retirement program. I read somewhere last week that only 14% of Americans even have an option to invest in a 401K. What do hourly workers, government workers, self-employed, and entrepreneurs do to set up a permanent, portable, pension for themselves that is regulated, but not under the scrutiny of the IRS?

    Check out 7702 products if you can find them on line. It solves virtually all the shortcomings of the IRA/401K trap. Most notably, the stock market risk dilemma. Most employees don’t have their retirement invested in the stock market casino – and for good reason. They may have at one time, but they saw their balance plummet by 50% twice in one decade. So they pulled their funds out. And they missed a phenomenal eight year run since March 2009 where the U.S. market tripled.

    If you could design the perfect investment vehicle, the 7702 would be it. You never lose account value. You can track many different equity markets. The balance grows tax-deferred and funds are accessed tax-free. The account is exempt from creditors like a retirement account. You can access the funds before you are 59-1/2 for any reason. If you access the funds, your funds are still inside the vehicle getting credited as if you hadn’t used them. If you happen to get sick or die prematurely, there’s a good chance you or your heirs will have a benefit that exceeds the balance in your account! In essence, you are setting up a vault of your funds that is isolated from the fractional reserve system house of cards.

    Real estate investor would usually want both a 7702 and a Roth Solo-401K. The Solo-K is best for investing where capital gains far exceed the 8% average long term yield of the stock market. Roth makes sure that those capital gains are tax-free.

    • ” in 2015, the median balance in 401K’s was $18,433. Not likely to pay for much retirement activities.”

      But what does that really tell us? The median employment length at a single employer is what, 4-7 years? Most people have money in several different 401Ks or hopefully IRAs because they don’t work for the same employer until retirement anymore. So median value of a single account is really not an indicator of retirement savings accumulated during all working years.

  37. Cory Binsfield

    This is a great article and hits upon why 401k’s have failed as an alternative to traditional pension plans. As defined benefit plans were slowly phased out of the work place to help companies reduce their liabilities, the 401k morphed from a plan for high income earners in the executive suite to a perk for the cubcild class.

    The biggest issue? It forced people to become money managers. This is why the return on the average 401k participant is much lower than the market. Most participants don’t have the skill set or temperament to manage an investment portfolio. Worse, as Brandon alludes, the choices can be dismal. You are essentially trying to pick a fund with the lowest cost (index funds) among a bunch of active funds that charge 1% or more. I have seen some funds sold by insurance companies charging 2% or more to compensate the broker advising on the fund and telling the plan sponsor the 401k is free since all the fees are shouldered by the plan participants.

    For what it is worth, I attempted to quantify how a single family rental would fare against a 401k. I’m not a tax expert, but the after tax results favored a single family by a long shot.

  38. Brandon – interesting article, but I question the validity of your assumptions and your conclusions.

    First, I don’t buy the 384 bp delta between a 401K return and the “market”. Fees are no where near this high in any 401K I’ve been involved in and I don’t think we are comparing apples to apples with regard to asset classes and risk either. Granted, there is an opportunity cost delta, but I would estimate it to be closer to 100-150 bp if risk levels are comparable. Maybe even 200 bp. But adjusting that single assumption would flip the results of your model pretty drastically.

    Second, even IF the delta is 384 bp, your model shows that the 401K option comes out ahead due to the employer match all the way thru retirement. Where your assumptions really don’t make sense is that the retiree using the 401K would choose to leave 401K funds in the inferior 401K for 20 years after retiring?!?

    So the takeaway should be straightforward – invest what you need to in order to maximize your employer match in the 401K, then roll those funds over to an IRA or even post tax ROTH or non-qualified accounts via distributions just as quickly as you can. I seem to change employers every 5 years or so, so I can get fully vested in my match, then roll out the 401K funds into an eTrade IRA when I leave the employer. You can also withdraw 50% of your vested 401K balance from a current employer and put that money in the market, or into real estate and potentially earn a higher return, the pay back your 401K at a fixed interest rate from the investment proceeds, all of which goes back into your own account, less a usually nominal lending fee.

  39. Skyler Massey

    Brandon, thanks for the article! The 401(k) debate is always interesting to follow. I’m convinced 401(k)s and the like are among the most misused, misunderstood, and mismanaged investment vehicles out there. 67% of those enrolled in a plan don’t even realize there are any fees. That’s far from the truth!

    Some 401(k) plans are great and others are lousy. Whether or not someone should contribute to their plan depends entirely on their goals, their plan, and their circumstances. There is no blanket answer that’s right for everyone.

    Here’s the guide I use to help people get the most out of their 401(k):

    It provides a framework to help look at fees, investment options, employer match, contribution frequency, etc.

    Again, thanks for the article!

  40. John Murray

    All investments are about paying the least amount of taxes and getting the maximum gain. The idea of tax deferment is to pay the tax when it benefits the individual. With defined benefit plans being almost eliminated from the working people in the US, some other means by the IRS were installed. Deferred Compensation for the public sector and 401K for the private sector are the only 2 choices workers have. Social Security is the last of the great defined benefit plans that most US workers will ever see. The individual must decide how to invest and how to pay the minimum tax. Unfortunately most people in the US do not pay attention to what their money is doing.

  41. Keith Weinhold

    I sure haven’t read every comment. But it seems like a lot of people miss the big picture with 401(k)s:

    They are Salary Reduction Plans.
    Instead, choose a Salary Increase Plan.

    When 401(k)s were first rolled out, they even were ominously called “Salary Reduction Plans”! To encourage participation, they scrapped the name. Salary reduction is still what 401(k)s principally do to you.

    Instead, by investing your funds into cash-flowing real estate, you’ve selected a “Salary Increase Plan”. Now you’ve increased your income in young age, middle age, and old age, and still receive tax benefit.

    401(k)s aren’t tax-deferral plans so much as they are life-deferral plans.

    People take a magnifying glass to 401(k) by looking for things like: 12b-1 fees, weighing fund selections, tinkering with asset allocation, and more. But that’s all of minor impact to your life.

    Don’t give yourself a pay cut.
    Give yourself a raise by buying cash-flowing assets.

    Why “delay gratification” if there’s no benefit in the delay?

  42. Jonathan Henley

    I have been struggling with this a lot lately. I am new to SFR investing but have begun a portfolio this year. My company has a very generous 401(k) matching policy: they provide a 50% match of all my contributions, right up to the legal limit. I am not currently maxing out my 401(k) contributions, and I am unsure if I should use funds to purchase SFRs that could otherwise be going into the 401(k) with the 50% match. It seems to me that a great return on real estate would be in the 25%-35% range (for COC), which is handily beaten by my employer’s match. Am I right in thinking that I should get to where I can max out my contributions before purchasing more properties?

    • Nate Reed

      “It seems to me that a great return on real estate would be in the 25%-35% range (for COC), which is handily beaten by my employer’s match.”

      Do the IRR calculation on your 401(k) with employer match vs. the ROI on a property over a longer period of time. I think you will be surprised. The longer the timeframe, the less impactful the match that occurs in the first year. Also, take into account taxes. You will have to pay taxes on 401k distributions. Rental property done right should have no taxable income and capital gains can be deferred indefinitely through 1031 exchanges.

      Getting the employer match is good, just understand what you’re giving up.

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