401(k) Plan Definition : Rebellion Examines the 401(k)

401(k) Plan Definition : Rebellion Examines the 401(k)

401(k) Plan Definition : Since its inception in 1978, the 401(k) has grown to become arguably the most popular retirement plan in the United States. In essence, it enables individuals to contribute a portion of their income to investments, including stocks, bonds, or real estate, without the need to pay any income taxes.

Herein lies the advantage of the 401(k) account: individuals are able to invest money without it first being taxed, affording them a much greater amount of investable cash.

Instead of that money being taxed before it is invested, it is taxed when it is withdrawn from the account, after it has compounded over the years.

Due to this major advantage, most individuals who have a 401(k) tout it to friends and relatives; with few exceptions, those who have a 401(k) are proponents of the plan.

While the 401(k) is undoubtedly effective and will likely result in millions of Americans having at least some critical retirement savings that they would not otherwise have, there appears to be a pronounced shortcoming of the plan.

In my view, the most salient shortcoming of the 401(k) is that it encourages individuals to invest without also educating them about the calamitous impact of fees that they are required to pay in order to do so.

It is certainly possible that if those interested in opening a 401(k) account were aware of the disastrous toll that fees would take on their savings over time, they would choose not to open an account.

Instead, they might choose to directly invest in an S&P 500 index fund or total stock market index fund without opening a 401(k), thereby benefiting from the stock market’s growth over time without incurring as many fees.

However, this argument overlooks the characteristic that affords the 401(k) primacy, namely that it enables individuals to defer paying taxes until after their money has grown over time. If individuals invested directly in stocks, bonds, real estate, etc., without opening a 401(k) account, they would be forced to pay taxes on their income before investing it.

While the above is true, if individuals chose not to open a 401(k) account, they would likely save tens of thousands of dollars over time—and potentially hundreds of thousands—by avoiding large and varied fees, including investment, administrative, and service fees associated with their account.

I believe that while investing in a 401(k) can be a very effective method of saving for retirement, people often fail to consider the alternatives and research their options more thoroughly before opening an account.

Furthermore, I believe that this tendency among individuals not to heed the costs associated with the plan is exacerbated by the fact that the 401(k) has been, and continues to be, in vogue.

Written by Gihyen Eom

Edited by Ramsay Bader & Alexander Fleiss

401(k) Plan Definition : Rebellion Examines the 401(k)

Leading Artificial Intelligence and Financial Advisor – Rebellion Research

The Basics of a 401(k) Retirement Plan (investopedia.com)