The Worst 401(k) Advice Ever

Posted on June 5, 2015
Filed Under 401K, Investment Strategy, Investor Mistakes, Personal Investing, Retirement savings

In our society, those who step the furthest outside of conventional norms tend to get the most attention. See: Kardashian, Kim.

Which brings me to today’s topic. James Altucher has been getting lots of attention lately because of a 62-second video he posted for Business Insider. The video’s target audience seems to be millennials, folks in their 20s and 30s. Altucher is something of a minor celebrity in the financial world, with several books to his name, a hedge fund, a podcast, and more.

The video’s title is provocative: “Why investing in a 401(k) is a complete waste of money.”

A complete waste, eh? Let me put it as mildly as I can: Watching this one minute video is (almost) a complete waste of time. I stuck the “almost” modifier in there because he manages to shoehorn one or two sensible thoughts into his short rant.

Why don’t you go ahead and watch it before proceeding. Click here. I’ll wait.

Back? That was fun, right? His hair made you smile. And he sure looks sincere.

OK, let’s start with the sensible advice. Investing in yourself makes perfect sense. I’ve always done it and I’ve advised my kids to do it. Then, too, he does correctly warn that if you withdraw 401(k) money before retirement you pay a big penalty.

But wait. Didn’t he also say, “I honestly think you should take your money out of 401(k)s.”

Yes, he warns you there is a penalty if you withdraw money, and then he tells you to do exactly that! He says, “They’re doing whatever they want, they’re paying themselves salaries…” Well, um, yes, everyone who runs a business charges for their services, including mutual funds and investment advisors. And the mutual fund’s fees are always fully disclosed. But “doing whatever they want?” No, they do what you want. If you invest in a mutual fund that focuses on, say, small cap stocks, that is what you will invest in, not whatever they want. It’s an insulting and weird claim.

And then he gets loopy. “The average 401(k) probably returns, like one-half percent per year.”

What? What time frame is he using? Not recent returns, that’s for sure. Starting with 2014 and going backwards, here are the returns for the past five years of the Lipper Growth Fund Index (a reasonable benchmark for typical mutual funds and 401(k) investors): + 10.3 percent, +34.4 percent, +16.8 percent, -3.0 percent, +16.2 percent. That works out to an average annualized gain of 14.3 percent.

Of course five years, as any competent financial advisor will tell you, is not long enough to draw conclusions. So let’s look at the ten-year return of that index, a time frame that includes the devastating Great Recession of 2008-09. Even there, the annualized rate of return of that index is 6.9 percent. (Those numbers include all mutual fund expenses, but not any 401(k) administrative fees, which would likely reduce the annual returns by perhaps 1 percentage point per year. Past performance does not guarantee future results.)

So where does he get the preposterous claim of “one-half percent per year?”

He also ignores the fact that many 401(k) plans offer an employer match. That is, you get money from your company that matches some or all of whatever you put into your 401(k). It’s free money! Or to put it another way, it is a guaranteed 100 percent return on your investment. Turning that money down is crazy.

Altucher urges young folks to ignore retirement accounts and invest in themselves: “That’s how you make money in your 20s and 30s.” But James! Many have called compounding the eighth wonder of the world. And James, you know that the magic of compounding only works over many years, so the longer that young person invests, the better the end results are likely to be.

One video won’t change the world. I decided to write this rebuttal not so much as a direct attack on this particular video but because some of what Altucher said reflects views held by others as well.

Please, dear Millennials, don’t fall for this nonsense.


This article originally appeared in the Huffington Post, 5/19/15.


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