The Uncomfortable Truth About 401(k)s

[00:02] account in the country. And if you have one, you should likely be using it. But there are some details about 401k's that people often leave out and some time. >> We have $401,000.

[00:17] >> Uh that says you have a 401k account. >> Guys, I am so excited because today we're [music] going to cover five uncomfortable truths about 401k's that most people aren't talking about. So that way you can get the most out of

[00:31] yours. One of the mistakes people often make with 401k's is treating it like a complete retirement strategy instead of one piece of a bigger picture. If you retire with everything in a traditional 401k, every single dollar you pull out

[00:45] income. And if you've been a diligent saver for 30 or 40 years, you could be sitting on a pretty massive balance, which sounds like a great problem to which sounds like a great problem to have until you hit RMD age. And the IRS

[00:59] forces you to start taking money out whether you need it or not. If your traditional 401k grows large enough, those forced withdrawals, also known as required minimum distributions, can push you into a higher tax bracket. They can

[01:12] [music] spike your Medicare premiums and they can create a tax bomb that you never saw coming. And that's why the first uncomfortable truth is that your 401k alone is probably not enough. Now, don't mishear me. A 401k is a great

[01:27] account to have, but adding other account types to the mix can give you some flexibility that can really help you out from a tax perspective. When it comes to saving for retirement, there are three buckets that you generally

[01:39] which would be your Roth accounts and HSAs, >> your tax-deferred bucket, which is your traditional 401k, your IRAs or other employer-sponsored plans, and then the after-tax bucket, which would be things

[01:52] like a taxable brokerage account or a trust account. The goal is to have money in all three buckets so that in retirement, you can draw from different accounts depending on your tax situation each year. A 401k fills that tax

[02:05] deferred bucket really well, but don't leave the other two empty. Uncomfortable truth number two, having a 401k doesn't build wealth. Contributing to it does. This one might seem obvious, but the data tells a far different story.

[02:19] According to Vanguard's How America Saves Report, the median Vanguard defined contribution plan participant deferred just 6.8% [music] of their income in 2024. That's way below what it needs to be for a

[02:32] 25% [music] of your gross income saved and invested across all of your accounts. We know that that sounds like a stretch for a lot of people, but we've done the math. If you're investing 25% of your gross

[02:45] income by age 30, you will likely be able to replace 80% of your able to replace 80% of your pre-retirement income by age 60. So, it's a target that actually puts you on track for financial independence. But,

[02:58] here's the thing, depending on how old you are, you might not actually save exactly 25%. If you want to know how much you should save based on your age and your goals, check out our brand new deliverable How Much Should You Save?

[03:12] It's a resource that you can find moneyguy.com/resources. It's totally free and it can help you figure out exactly what you need to be doing to reach your retirement goal. The next uncomfortable truth about 401ks

[03:24] might come as a total shock, especially to those of you with a Roth 401k, because your account might not be what you think it is. If your employer offers a Roth 401k and you've been taking advantage of it, that's awesome.

[03:38] But, here's something a lot of people don't realize, your Roth 401k actually has two separate buckets inside of it. The money you contribute goes in on an after-tax basis, but your employer's matching contribution, they have to go

[03:52] in on the pre-tax side into the traditional 401k bucket. And that's the third uncomfortable truth about 401k's. Your Roth 401k isn't entirely Roth. So, what does that mean for you? It means the employer match portion of your Roth

[04:07] 401k will be taxable when you withdraw it in retirement, just like a traditional 401k. Now, this doesn't mean you shouldn't use a Roth 401k. You likely should, but you need to keep in mind that not all of your balance is

[04:20] tax-free. This is something to factor into your planning, especially when brackets in retirement. The next truth about 401k's is more than uncomfortable. According to the Bureau of Labor Statistics, the average American changes

[04:34] jobs about 12 times over the course of their career. And every time that happens, there's a 401k that needs to be dealt with. The problem is that most people just

[04:46] don't deal with it. According to one report, there are nearly 32 million forgotten or abandoned 401k accounts in the US right now. And those accounts the US right now. And those accounts hold about 2.1 trillion dollars in

[05:00] assets. And that figure represents close to 25% of all 401k assets in the country. That's insane. Nearly a quarter of all money in all 401k plans is just

[05:13] sitting there in accounts that belong to people who moved on and forgot to take their money with them. Now, it's likely that many of these left behind 401k's will eventually be found and eventually be consolidated. But, there's also a

[05:27] good chance they missed out on higher returns and likely incurred higher than necessary fees while they were being neglected. And that's why the next that you have to keep up with it. When you leave a job, make sure you don't

[05:41] leave your 401k behind. Either roll it into your new employer's plan or roll it into an IRA where you have full control over it or intentionally leave it behind for reasons that you are aware of. Now, that brings us to Uncomfortable Truth

[05:55] Number Five. Fees matter way more than people think. Over a long investing horizon, fees can be a powerful force working against your wealth. Let's say that there are two funds that both track the S&P 500, which historically has had

[06:09] the S&P 500, which historically has had an annual return of around 10%. Fund A is a low-cost index fund with an internal expense ratio of 0.015%

[06:26] expense ratio of 0.67% giving it a net return of 9.33%. [music] While that difference may sound tiny, over time it can be massive. If someone

[06:38] invested $500 per month for 40 years, Fund A would grow to over $3 million while Fund B would only make it to around 2 and 1/2 million. That's over half a million dollars less in retirement all because of a fee that was

[06:53] slightly too high. And here's the really uncomfortable part. Most people have no idea what they're paying because the fees in your 401k don't show up as a separate line item on your statement. [music] They're likely buried in the

[07:06] fund prospectuses or plan documents that almost nobody reads. They include things like expense ratios, administrative fees, and 12b-1 fees, all of which quietly chip away at the returns for you year after year. According to industry

[07:21] research, the average 401k participant pays about half a percent per year in total plan costs, and participants in smaller plans may pay even more. So, go take a look at the investment options inside your 401k and make sure you pay

[07:35] attention to the expense ratios. In most plans, you'll find a mix of higher-cost actively managed funds, but also lower cost index funds. In a large majority of cases, you'd likely be better off using the index funds. And if your plan only

[07:49] offers the high cost options, let your human resources department know. Your employer actually has a fiduciary responsibility to offer reasonable investment options, so you may be able to open the door to better options just

[08:02] by starting the conversation. Look, 401(k)s are genuinely one of the best wealth-building tools available. We're not here to scare you away from using yours. If your employer offers one, especially with a match, you should

[08:15] likely be taking advantage of it. But taking advantage of it means more than just signing up. It means contributing enough, understanding what you own, sticking with it, keeping an eye on fees, and making it part of your

[08:29] want to know how much money you should have in your 401(k), check out this video right here to see the average 401(k) balance by age. And as always, keep building towards your great, big, beautiful tomorrow.