Actually I HAVE done the math with spreadsheets! I have compared different mortgage lengths, interest rates, etc. (also factoring in the tax write off you get for the interest you pay on the mortgage), compared investing differing % of income in a 401k vs other non-tax deferred accounts, took inflation into account, tried various scenarios with different tax rates now and later (always assuming my rate will go up over time), looked at converting a traditional IRA to Roth, etc. etc. I’ve done all of this over the recent years in multiple spreadsheets, and while I wouldn’t sink every dime I had into a 401k, I’d certainly put enough in it to get the maximum company match. Now my situation is different from some others (I have no debt outside my mortgage), so your mileage may vary, but there’s no way a 401k is a scam. I also saw a lot of misconceptions or misleading statements in Wayne’s post. Time and space limits me from addressing all of them, but you will NOT be giving away 80% of your profits. Certainly the fund management will take a cut (as they do for ANY fund, and yes I’m aware that there are issues with 401k funds taking too much for that cut, but it’s not like they’re taking 10% of your profits or anything like that), but even if your maximum tax bracket turns out to be 50%, most of us will only have a small amount of our money being taxed at that rate, and the majority of it will be taxed at the lower brackets. Yes, you need to add state tax too. But if you don’t pay the taxes now, your entire pot of money is growing, not just the amount you can put into a post-tax fund which had been depleted by taxes from the get-go. Certainly if you do well with your investments, the goverment will make more money in the long run by taxing you later, which is fine since YOU will be making more money too. I’m sorry, but the 80% number is completely pulled out of your ass and there’s no way you can possibly demonstrate that to be true.

Also, the claim about taking 1% of your principle for “management fees” — that isn’t typical of most mutual funds. If you go to a financial planner, they may charge you 1% of your assets under management, but if you’re smart, you go to a “fee-only” planner and let them do the work to tell you what to invest in, and then YOU make the online transactions yourself and save a boatload of money. You probably don’t want a planner churning your portfolio and opening yourself up to capital gains taxes either. Just re-balance your portfolio on occasion with their guidance at ~$200/quarter or so, and if you have $1M of assets, that is only 0.08% of your portfolio.

The employer may match a certain amount but is not required and this is becoming more common. If your employer does not match you are better off taking that money and starting your own IRA. In the cases where an employer does match there are many requirements that may have to be met before they will match. First you may have to be vested and it will take a certain amount of years before they contribute. Also they could take these back if they eliminate you or you leave for another employer.

Then in terms of the investments and fees involved is another misleading factor of these plans. You are often limited in choosing your investments and tied to certain agents and brokers. These fees are often very high and take away for any gains that you may have. Also these investments are heavily reliant on the stocks and the stock market in general. If you have a stock market that haven’t been good, like the last 10 years you are not going to make much in these plans. You would better off starting an IRA invested in more conservative investments. The 401k is only good for very few and most would be better off investing on their own or having a traditional pension. But the traditional pension is not good for the employer.

Look at public employees and the scrutiny that pension are causing lately. Pensions are expensive to fund and public employees are funded by local and state taxes. Employers developed the 401k because it’s in their benefit, not employees. Many did not want to fund pensions anymore because they are costly. They developed the 401k to limit their contributions!

Before you speak, do the math and you will discover are dead wrong. Simple math and Accounting 101 tells you the 401k is a liability to you and an asset to Wall Street, US Government, and to your banker. The 401k earns money for Wall St, Govt in future taxes, and your banker whom you pay mortgage interest to. The 401k does not work for you, it works for them. You take 100% risk in stocks, and they get 80% of the profits. What will your tax rate be when you retire? Did you know if you are diversified into mutual funds, they typically take 1% of your entire principal per year for “management fees”. Plus if you have home, automobile, or credit card debt, contributing to the 401k will keep you poorer longer. For instance, I’ve had $20k tied up in a 401k, which I could have withdrawn 5 years ago. After taxes I would have wound up with $13k to pay down a 7% mortgage. By keeping the $20k ($13k after taxes) in the 401k it cost me $25,000 in interest on the $13k, in just 5 years! That is how a 401k keeps you poor, and I’m piping mad about it.

That eligible $20,000 in the 401k before taxes COST me $25,000 in after tax money, in just 5 years.

Also figure up, after 30 years of contributions, and mutual funds getting 1%/year of the principal, they essentially get 25% of your total money. Then what will your tax rate be when you retire? I bet my tax rate will be higher. That is how they get 80% of your profits……just do the math in an Excel spreadsheet, and run the numbers…..The 401k works for the govt, wall street, and your banker…..It NEVER works for you. What’s better, to pay for a house in 15 years, and be debt free for 15 years the Dave Ramsey way, or to pay on a house 30 years AND contribute to a 401k? That house will cost you 3 nearly times as much in interest because you chose to contribute to the 401k. For me, I’d rather own 3 more houses! Do the math. Do the accounting: simple assets and simple liabilities. You can only classify 60% of the initial principal value of the 401k as an asset in your name. Remember taxes due today and in the future are classified as liabilities. Unpaid “management fees” to mutual funds are liabilities. Interest you are paying on your home, car, credit cards are liabilities you have to pay for. Why would you invest in a liability like a 401k? Plus the 401k laws change yearly (See amendments to the ERISA act), so your money is subject to the govt changing the rules and extending the retirement age. Will you be alive to withdraw from the 401k? Plus if the market goes down, wall street takes a bigger chunk of your profits (1% of your total principal). So the numbers and laws and regulations are against you getting ahead in a 401k. There are a lot of strings attached that no mutual fund salesman will tell you about (after all, it is mutual fund salesmen that persuade you to contribute), and the government loves it when you contribute because it earns income for them! Find me one person who got rich from a 401k that was “diversified an a portfolio of mutual funds”?

I will grant you some leniency on 401k for people who are bad with money and blow their money on vacations and new cars. But for people who can budget a check book, a 401k is a very baaaaaad “investment”. In fact, by design, a 401k is not an investment, it is a tool to keep you poor.

Please counter my argument, but I ask you FIRST, run the numbers on an excel spreadsheet for 20 years, considering good 8%-10% stock market growth with a couple 5% down years, dollar cost averaging, using today’s tax rates, mutual fund fees, and assume you have a 30 year mortgage paying interest to the banker. For simplicity, leave inflation out of the equation (if we do factor in inflation, your numbers in terms of purchasing power will be peanuts in the end). I have done this, and I have run it through my CPA (she at first told me the same old sales job language you have given, but after she discovered I knew what I was talking about, she dropped her “act” and started working FOR ME.).

http://www.cbc.ca/marketplace/2010/road_to_rich_dad/main.html