A 401K Is Not an Investment

I’ve seen more videos online than I’d care to count disparaging 401(k)s and IRAs as “bad investments”. I have one word for these videos: ridiculous. Ok, I have a few more. Misleading. Absurd. Deceitful. You get the picture. These videos are the epitome of sensationalism.

Key takeaway: Please don’t take financial advice from anyone on Tik Tok. Feel free to stop reading and move on with your day.

I don’t have to tell you this, but I will. The makers of these videos are always selling you something. Could be a course on “the secrets to success” (spoiler alert: there are no secrets). Or maybe they have a magical strategy (*cough* insurance) that removes all risk while giving you all the upside. Don’t worry, these “strategies” will cost you thousands of dollars hidden behind nonsense contracts while never really delivering on the seller’s promise. By the time you figure it out, the seller will be long gone.

Matt, you’re ranting. Sorry. Let’s move on.

At the core of these videos is the lie that “401(k)s are bad investments”. They’ll even go as far as telling you what a 401(k) “returns” every year (hint: it’s low).

Key takeaway: 401(k)s are NOT investments. IRAs are NOT investments. Brokerage accounts are NOT investments. They are all simply places where investments go.

Wait, what?

That’s right. Your return on investment has nothing to do with where the money is held. It has everything to do with how your money is invested inside the account.
Note: Fees associated with different accounts will impact long-term returns.

Let’s lock this in with a totally realistic metaphor. Imagine you wake up one day and decide to clean up all those pesky rocks in your backyard. (What’s his deal with rocks?). You drive to the store and buy a bucket. Then you fill your bucket with rocks. Good work. You’ve earned a nap.

Matt, where’s this going? Good question.

The store in this scenario is akin to a custodian who houses your investment accounts. The bucket is the account (IRA, 401(k), brokerage account). The rocks are the investments. The rocks are completely independent of the store and the bucket. You can add and remove rocks as you choose. You could take your rocks from one bucket and move them to another bucket. You could even put water, or grass, or sand in the bucket. But it’s still just a bucket. There are different stores that sell buckets. And there are all sorts of things you can put in your bucket.

Not a fan of metaphors? Here’s a picture:

Let’s say your friend has an IRA at Fidelity they never invested—it’s just in cash. You also have an IRA at Fidelity that is invested in a diversified portfolio of all stocks.

Both of you are maxing it out every year.

Fast forward twenty years:

Your friend: “IRAs are the worst! I’ve had no growth.”

You: “Really? Mine has been great!”

Confused and angry, your friend doesn’t understand. They heard on Tik Tok that all IRAs are bad investments, which they now obviously believe. They’ve purchased a penny stock trading course that is guaranteed to make them rich (it did not make them rich).

You are now equipped to tell your friend that the only difference between your IRA and their IRA was the investments inside the account. You invested in assets geared for long term growth. Your friend stayed in cash. The IRA is not good or bad—it’s just an account. The choice not to invest inside the account was a bad choice.

Next time someone tells you a “401(k) is a bad investment”, feel free to let them know that’s not possible. A 401(k) is not an investment. (To be clear, you might also confuse them if you say that a 401(k) is a bucket).

Most importantly, remember, friends don’t let friends buy online courses or investment products from people on Tik Tok.

Here’s to making money matter!