TikTok viral Video denouncing 401(k)s as a “fraud” Retirement savings experts say this is clearly false and could potentially mislead hundreds of thousands of retirement savers, especially Gen Z.
“TikTok influencers use click-inducing, hyperbolic terms like ‘scam’ to mislead consumers,” says Eddie Patel, a certified financial planner who manages $100 million in client assets. says.
The video itself is biased, promoting two complex variable life insurance policies as an alternative to 401(k)s, but says, “Gen Z is getting a scary portion of their information from TikTok influencers. ”, Patel added.
CPA who “makes me want to bang my head on the desk” AJ Campo speaks to Morningstar.
401(k) benefits
“The 401(k) was the most important development in retirement planning after the Social Security program,” Patel says.
Currently, nearly two-thirds of employers offering 401(k)s automatically enroll employees in their plans, and 98% of them match at least a portion of the employee’s contributions. It is consistent, typically 4%, but can reach 6% in some cases.
This means that even if you’re not thinking about retirement at all, your employer can put you on the hook for retirement savings and guarantee you a sizable return through a match.
Most 401(k) savers choose the traditional option over the Roth option. This means your 401(k) contributions will be deducted from your paycheck, thereby reducing the amount of taxes you pay. Additionally, compounding returns from investments also increase deferred taxes in a 401(k), says Sean Menichella, managing director at Beacon Financial Services.
“I think 401(k)s have been a huge positive for retirement investors,” Menichella said.
In addition to automatically enrolling participants, many 401(k)s typically invest savers’ money in institutionally priced, professionally managed, and well-diversified mutual funds. . A typical choice is a target date fund. This is a type of “set it and forget it” fund that reduces equity risk as investors approach their retirement target date.
How can you improve your 401(k)?
Life insurance plans promoted in TikTok videos are sold on commission and come with high fees, retirement experts say.
“Variable insurance is very expensive and can be as volatile or more volatile than a 401(k),” Patel says. “Agents are paid very high fees to weave very inaccurate narratives that can lead people down very dark investment paths.”
That’s not to say that 401(k) retirement plans themselves don’t need improvement.
“Although the level of fee transparency has improved compared to 10 years ago, there are still issues with adequate disclosure of the fees participants are actually paying,” Menichella said. “I believe there may also be a further push to bring these costs down, which will lead to more transparent disclosure from plan participants.”
Employers could also provide more financial education to their workers, especially in these days of fighting inflation, he added.
“In today’s economy, young workers are already finding it difficult to save for retirement,” Menichella says. “Many young people are feeling financial pressure from student loan payments, an expensive housing market, and overall prices.”
Menikela continued, “In addition to saving for retirement, we should encourage ways for workers to deal with other financial concerns, such as buying a home and planning their finances, and give them opportunities to participate.” “There is.” more Instead of discouraging them, we try to save for retirement. ”
Regarding the TikTok video’s point that 401(k) savers cannot access their money without fees until they reach 59-1/2, this is because 401(k) money is retirement money. In fact, it may be seen as a positive.
The video also criticizes 401(k) plans for tax deferrals, arguing that taxes generally go up and it’s not natural for people to pay less in retirement. But as mentioned earlier, earnings in a 401(k) grow tax-free, and savers often have a Roth 401(k) option that allows them to withdraw money tax-free on the back end.
“TikTok is just littered with scary information,” Campo warns viewers of the video, which has been viewed more than 2 million times, and other copycat videos.