6 Reasons the 401k is a ‘Scam’ (Wait, What?)

These takes are so hot they burn insincerity

401ks, retirement, scams, Wall StreetMost of the points are easily dismissed.

We only publish this stuff to give retirement advisors an idea of what they’ll have to debunk when employees proudly produce clipped articles in 401k education and enrollment meetings.

Pamela Yellen, author and “financial investigator,” sent us the following pitch with reasons she feels 401ks are a fraud.

It included a link to a Wall Street Journal article as an appeal to authority, which completely misinterprets 401k father Ted Benna’s views, at least from when he spoke with us.

Most of her points are easily swatted. For instance, her first about the possibility of rising tax rates; yes, market and policy uncertainty exist, and there’s always the possibility tax rates will increase. She might also be surprised to know the universe is in flux.

Here’s some great advice—have participants wait for perfect market stasis before investing. How long would they wait? Could such a thing ever happen? It’s why Investing 101 demands basic asset allocation and properly diversified portfolios.

The rest of her arguments are more of the same, which we reprint below in all their sophomoric glory. Fostering and exploiting an “us vs. them” mentality only serves Yellen’s interests, which is to sell books. The wicked Wall Street she describes (which she conflates with the financial services industry as a whole) is overwhelmingly populated with committed professionals dedicated to helping.

We’d advise caution with such market prophets preaching a better “system,” but feel you already know.


The folks who originally pushed the 401k as the solution for retirement savings now say it is a bad idea, yet Wall Street and the government continue to push it as if Americans had no other choices. Pamela outlines 6 reasons the 401k is a scam and why people don’t have to risk their retirement savings in order to grow wealth.

  1. The Tax-Deferral Scam –No one knows what tax rates will be in the future but most people believe they will only go up, due to our country’s unsustainable debt and aging demographics, Pamela says. “Unfortunately, if tax rates do go up and you’re successful in growing your nest-egg, you’ll only be paying higher taxes on a bigger number.”
  2. The “Free Money” Scam –Think you are getting “free money” in the form of your employer’s 401k match? Think again. A Center for Retirement Research study of tax data found that for every dollar an employer contributes to your 401k match, they pay 90 cents less salary to men and 99 cents less to women on average.
  3. Fees Devour Your Hard-Earned Money –In spite of the rules passed a few years ago requiring better 401k fee disclosure, surveys show most participants still have no clue how much they’re actually paying. But according to Brightscope, participants in small plans pay 1.9 percent in fees annually, and participants in large plans pay 1.08 percent per year. If those fees sound like ‘small change’ to you, then here’s a wake-up call. Fees of only 1 percent per year can slash the value of your savings by 28 percent over the next 35 years, according to the Department of Labor.
  4. Putting Your Money in Prison –­­It’s like a trade with the devil: Give me all your savings in return for tax-deferral (a scam as we’ve seen) and an employer match (another scam), and I’ll keep it under lock and key for you until you’re 59.5 years old. You have to beg for permission to use your own money! There are all kinds of restrictions and penalties for accessing your own money.
  5. The Myth of Market Returns –You’re told that over the long term, you can do well in the stock market. But over the last three decades, the typical equity mutual fund investor has earned only 3.98 percent per year, beating inflation by only 1.3 percent per year, according to the DALBAR studies. Yet Wall Street has brainwashed us into believing we have to risk our money in order to get any kind of decent returns. And so we continue to blindly fund our 401ks like lemmings following each other off a cliff.
  6. After Decades of Being Lab Rats in the Great 401k Experiment, Most Pre-Retirees Still Don’t Have Enough Saved –Even the ‘father’ of the 401k, Ted Benna, has called it an “out of control monster” that should be blown up.

“So are there any good alternatives to the 401k? The answer is YES, but of course you won’t hear about it from Wall Street,” according to Pamela.

From her research Pamela shares a time-tested retirement savings method that has none of the disadvantages of the 401k–one that allows people to know guaranteed minimum value of their savings on the day they plan to tap into them, and every step along the way. This method, which Pamela calls Bank On Yourself, has provided savers with up to 9.94 percent annual returns over the last half century, and has never had a losing year–ever–in 160 years.

9 Comments on "6 Reasons the 401k is a ‘Scam’ (Wait, What?)"

  1. Um, where’s your rebuttal?

  2. yes – I am waiting for your rebuttal to this as is dale mentions – as your preamble implies will be provided.

    I will add that I don’t find all her points to be far fetched – in fact they are quite valid. That said – her points are a shell covering implying that ALL is as she says where as -it should only refer to “some” of the plans. as a rebuttal 1) Do we have the possibility of rising tax rates ? absolutely – but that’s why “most” plans offer the ability to save in a roth. Its called hedging – that’s why we discuss that with our plan participants. 2) The free money scam I don’t buy – I don’t think women getting paid less has anything to do with retirement savings and would love to see supporting data. 3) DUH! but there is more to this than simply hi fees eating away at ur savings. sure there are plans that are WAYYYY over priced because plan sponsors fail in their responsibilities as fiduciaries – and sure there are advisors that charge way more than they should and “set it and forget it”….but then – some of the onus can also go onto the participants -for not looking – not asking – not clarifying. I make myself available minimum 2-4x per year at all our plans – and do onsite 1 on 1’s – even for plans with 500 participants. I am there – utilize me as a resource! and I know this is the case elsewhere too – but people don’t. that is on them. 4) I think the 401k prison is a way better prison than what we know as “credit cards” are – seriously – MANY people need guidelines and rules to contain their spending – and this does it. There should be a greater attack on the scam that CC companies pull – how many people struggle paying off just the APR and cant dig themselves out of a hole – esp when the aprs are in the 20s! 5) ok that’s just dumb – and there is no data to prove that- in fact there is only data to prove otherwise. 6) that statement is dead on – except for the fact that the issue isn’t the 401k beast – the issues are rising costs, a generation incapable of living within their means (yes X’ers – we stink like that), credit card bs, medical mania, and so on and so forth.

    btw – ur article had a ton of potential – but seriously fell short.

  3. Her arguments are on point, I tell my clients the same thing. It doesn’t mean it’s a “scam,” but there are some serious restrictions and factors that go into 401k’s that can greatly affect clients in the long run. Not really sure what you’re trying to prove out of re-posting her arguments. If anything, she makes more sense than this sorry excuse for an article.

  4. Lol…her solution is dividend paying whole life insurance. I could be wrong but isnt a cash withdrawal beyond premiums a taxable event? Just thinking out loud…

  5. Great! So, a 401(k) is a scam. It’s bad enough that 95% of those retiring are dependent on some sort of “social welfare” program. Now you want to discourage them from participating in a 401(k)! You must have a better alternative? How about some type of new-fangled reverse triple salchow life insurance policy that generates tax-deferred savings and tax free withdrawals? That’s right – give it all to a life insurance company and generate large commissions for the pirate that sold it to you! I’ve seen all the tricks in the book! I’ve been in this business 30 years and am a retired university finance professor! My advice, participate in a 401(k), maximize the amount you are able to contribute annually, start at a young age, and go with the lowest cost diversified domestic equity options you have available!

    • As a retired professor you should better understand life insurance. The original pension plans, back in the early 1900’s to 1950’s were invested in life insurance. They worked! People have been using 401k’s now since 1980 and what do they have to show for it, other than the fact that most can not retire. They have tried insurance, and it works. They tried the 401k and it doesn’t work. Its a good thing you are not licensed cause your advice is way off!

  6. Well ….Someone Im sure is making healthy insurance commissions on the Whole Life policies they promote. Sound like she is banking on individual buying these, many which are pure junk. From her website:

    “The Bank On Yourself system uses generally available whole life policies and riders. The information presented here is for educational purposes only and is not a solicitation for the purchase of any insurance or financial product. All guarantees are based on the claims-paying ability of the insurer. Excess policy loans can result in termination of a policy. A policy that lapses or is surrendered can potentially result in tax consequences. Your results will be different from those shown on this website, as each Bank On Yourself plan is custom tailored.”

  7. Mark, for the record, withdrawals in excess of basis are a capital gains event. The smart way to use CV life insurance is through loans. Loans are not taxable.
    I’ve been in the insurance business and represent the biggest life insurers in the world. The commission objection has always made no sense to me…Everybody in the financial services arena earns some sort of commission. I’m always befuddled by the argument that purchasing a product is somehow less valuable because a representative got paid a commission. Let’s see, when you buy a house, 6% is typical, then the mortgage to buy the house often has a spread or points built-in as commission. When you buy the furniture to fill the house, commissions are paid to the salesman…so riddle me this…how is an insurance commission any different? If the product is right for you, if it serves to fill a gap in your financial planning, what exactly is the problem? What’s the objection?

  8. 401k is a monumental scam. Here is good alternative that gives much higher return and is liquid with the following hypothetical scenario:

    1. Purchase a condo for 75K in cash
    2. Rent this condo out for $800 per month; After some HDD or HOA fees it might be $600 of net profit
    3. Annual return would be $7,200 which makes it a healthy 9.6% APY
    4. In 10 years this would pay for the investment.
    5. Annual real estate appreciation rate is an average 10% or $750 in this case
    6. In 10 years a condo would conservatively appreciate at 60% roughly increasing the value of condo to 120K
    7. If a condo is sold for $120,000 and the overall 10-year rental profit was $72,000, combining the two would bring $192,000
    8. Subtracting $75,000 (initial investment) from $192,000 would leave us with $117,000 or 156% of net profit and very little to no risk.
    I’d like to see 401k plan to try to match this hypothetical return.

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