A Conversation With Chat GPT About 401(k) Plans
Scam or not a scam? AI defends the status quo.
I’m not a huge fan of 401(k) plans. My own experience with these over the years is that they:
Have complex tax rules that if you don’t follow can cost you a lot of money in penalties (also Congress can change the rules anytime they want, especially if they need to raise more taxes)
Have limited investment options
Have fees that eat away at your returns (no I don’t care that they are fully disclosed)
Penalize you if you move investments around too much when you try to adjust to volatile market conditions
Enrich Wall Street and the Government at the expense of the plan participants who take on all the investment risk
Force you to compete with Wall Street “smart money” and program trading, which is really unfair; indeed you are the liquidity they can always depend on to buy when they want to sell
Are ultimately very costly when you start to withdraw your money and have to pay ordinary income taxes on the distributions, while other investors can enjoy lower capital gains taxes when they sell
Lure you in by reducing your current taxable income with the promise of growing your earnings “tax free” and employers sweeten the pot with “matching” contributions, which feels like free money - until you have to pay taxes on all of it when you withdraw your funds
If you have read some of my past work, you know I do like Roth IRA’s and I suppose that would extend to a Roth 401(k) as well, since you make all your contributions after tax, earnings grow tax free and you can withdraw tax free. A Roth IRA is way better in terms of investment options, flexibility of distributions and control versus a Roth 401(k), although you can contribute a lot more in a Roth 401(k) than you can in a Roth IRA and there are no income limits.
I thought it would be interesting to have a conversation with Chat GPT to see what it thought about my assertion that 401(k) plans are scams. Here’s the result. Enjoy.
Me: Let's talk about scams - I will give you a few things and you can make an argument with appropriate backup on why these might be considered scams. Sounds good?
AI: Sure, I can provide arguments and appropriate backup on why certain things might be considered scams. Please go ahead and give me the items you have in mind.
Me: 401(k) Plans
AI: A 401(k) plan itself is not a scam. It is a retirement savings plan sponsored by an employer that allows employees to contribute a portion of their pre-tax income to the plan, which is then invested in a range of assets such as stocks, bonds, and mutual funds.
However, some 401(k) plans may have fees that can be considered excessive or hidden, which could potentially harm the retirement savings of employees. According to a report by the Government Accountability Office (GAO), fees for 401(k) plans can vary significantly, and employees may not always be aware of these fees. Additionally, some plan providers may have conflicts of interest that could lead them to select higher fee investment options, even if there are lower-cost alternatives available.
Furthermore, some employers may not offer a match for employee contributions or may have restrictive vesting schedules, which could reduce the value of an employee's retirement savings. In such cases, employees may be better off investing in other retirement accounts such as Individual Retirement Accounts (IRAs) or Roth IRAs that offer more flexibility and control over investment choices.
In summary, while 401(k) plans themselves are not a scam, it is important for employees to be aware of the fees and restrictions associated with their plan and to carefully evaluate their investment options to ensure they are maximizing their retirement savings.
Me: Let's go back to 401(k) plans. You save your money before taxes to invest, but if you do well with your investments you will pay ordinary income taxes when you start taking distributions, potentially at higher rates and rewarding the government for your investing prowess. Also there are many rules that if not followed could cost you a lot of money in penalties if not followed and those rules can be changed at any time by Congress. 401(k) plans enrich Wall Street financial institutions at the expense of savers. Isn't that sort of a scam?
AI: While there are certainly aspects of 401(k) plans that can be considered problematic, I would not necessarily describe the system as a scam.
The taxation of 401(k) distributions is a standard feature of the U.S. tax code and applies to many types of retirement accounts, including traditional IRAs, 401(k)s, and pension plans. While it is true that taxes on 401(k) distributions can be higher than other types of income, this is because the money invested in a 401(k) grows tax-free, providing a significant benefit to savers during their working years.
Regarding the rules associated with 401(k) plans, it is true that there are many regulations and restrictions that must be followed in order to avoid penalties and other fees. However, these rules are in place to protect savers and ensure that retirement funds are being used for their intended purpose.
While it is also true that Wall Street financial institutions benefit from managing 401(k) plans and earning fees on assets under management, it is important to note that the vast majority of 401(k) fees are transparent and disclosed to participants. Additionally, employers have a fiduciary responsibility to ensure that fees are reasonable and in the best interests of their employees.
In summary, while there are certainly aspects of the 401(k) system that can be problematic, such as fees and taxation on distributions, I would not necessarily describe it as a scam. The system provides a valuable tool for retirement savings, and with careful planning and investment decisions, savers can build a solid foundation for their financial future.
Me: What does Robert Kiyosaki have to say about 401k plans?
AI: Robert Kiyosaki, the author of the best-selling personal finance book "Rich Dad Poor Dad," is a well-known critic of 401(k) plans. He argues that the fees associated with 401(k) plans, along with the limitations on investment options, can make it difficult for savers to build wealth.
Kiyosaki believes that the stock market is inherently volatile and subject to manipulation, and that investing in mutual funds and other stock-based options within a 401(k) can be risky. He suggests that investors should focus on building passive income streams, such as real estate investments, that can provide a more stable and reliable source of income over time.
Kiyosaki also criticizes the tax treatment of 401(k) plans, arguing that savers will ultimately pay more in taxes when they begin to withdraw funds from the account. He suggests that investors should instead focus on building tax-free income streams, such as through investments in real estate, precious metals, and other alternative assets.
Overall, Kiyosaki's views on 401(k) plans are controversial and have been met with criticism from some financial experts. While there are certainly limitations and risks associated with 401(k) plans, they can still be a valuable tool for retirement savings when used wisely and with careful planning. It is important for investors to carefully consider their individual needs and circumstances when making any investment decision, and to seek out advice from trusted and reputable financial professionals.
Me: Who benefits the most from 401(k) plans in your opinion: Wall Street, the Government or people who save in these? Also, if 401(k) plans are so great, why don't the wealthy use them as their primary investment vehicle?
AI: The benefits of 401(k) plans are distributed in different ways to different parties. Wall Street financial institutions benefit from the management fees and commissions charged for managing the assets in the plans. The government benefits from the tax revenue generated by the taxes paid on the distributions made from the 401(k) plans. However, people who save in these plans can also benefit by saving for their retirement and potentially growing their wealth over time.
Regarding the second part of your question, it is important to note that the wealthy often have access to a wider range of investment options than the average investor, including private equity, hedge funds, and real estate. These investments often offer greater returns and may be better suited to the unique needs and circumstances of high-net-worth individuals. Additionally, the wealthy may be able to take advantage of tax strategies, such as setting up family trusts or charitable foundations, to minimize their tax burden and maximize their returns.
However, it is worth noting that many high-net-worth individuals do use 401(k) plans and other retirement savings vehicles as part of their overall investment strategy. While they may not rely on them as their primary investment vehicle, they can still be a valuable tool for building wealth and achieving their long-term financial goals. It is important for investors to carefully consider their individual needs and circumstances when making any investment decision, and to seek out advice from trusted and reputable financial professionals.
While it might not be a total scam, a 401(k) plan is definitely designed to enrich Wall Street and the Government at the expense of the individual investor, who is ill equipped to compete with program trading and market manipulation and at the end of the day must “render unto Caesar what is Caesar’s.” Indeed, people who receive a W-2 are the most heavily taxed compared to business owners, investors and corporations. As Robert Kiyosaki has emphasized over the years this is what not to do: “Go to school, get a job, save in a 401(k) and invest in a diversified portfolio of mutual funds.” Employees have precious few tax deductions, so it’s natural to gravitate to retirement savings plans as a way to “save on taxes.” You are lured in by the ability to save a few dollars in taxes now and over time with investment earnings and maybe even further enticed by a company “match” - it’s free money after all, but just wait until you start taking the distributions! If you’re a great investor, the Government will be richly rewarded. Oh and you’ll get some of that as well, but the taxes will be colossal and if you need the money sooner than retirement, the early withdrawal penalties are eye watering. Getting a loan is not much better, since you have to pay it back. How confident are you that you can “beat inflation” and pick the best investments from a limited selection, especially if the game is rigged and the investment paradigm (passive investing / the “60/40” portfolio) is changing? How confident are you that tax rates will be lower for you when you retire with the amount of debt in the US? How confident are you that the rules won’t be changed by Congress at some point to raise more tax dollars? The debt clock keeps on ticking:
My own preference for a retirement plan now is to simply save in Bitcoin as I outlined here recently:
Not financial or legal advice, for entertainment only, do your own homework. I hope you find this post useful as you chart your personal financial course and Build a Bitcoin Fortress in 2023. To see all my books on investing and leadership, click here.
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