Are 401k Scams? Clear All Your Misconceptions About America’s Most Popular Retirement Plan

Are 401k Scams?

This question is hit a little differently after knowing more than 60% of the US workforce used it as their retirement plan in 2020, and only 25% of them had access to a pension plan.

If you ask some financial advisors, they will not be against a 401 k plan. Many will suggest that, on paper, it is the best deal for securing your post-retirement savings.

However, things have become difficult after many workers started noticing the additional fees, conditions, and piled-up charges associated with 401(K). Also, people are coming up with different reasons, making them think that 401(K) is a scam.

Reasons Why People Think 401k Are Scams

There are a few reasons why some investors feel that 401k are scam. Here are some popular criticisms that appear on the internet –

Rich People Do Not Use 401k

Some rich people made their claim not to put their money in 401k plans. Apparently, few people seem to believe that some individuals say so, knowing 401k is a scam. But in reality, they do not want to put their money in 401k because they have different other avenues of investment. Some reasons would be –

• Excessively rich people do not have an employer to put money for them in the 401k plan. So, they do not really need a 401k plan.
• Also, rich investors can have specialized money management plans for investment tailored for high net worth people.

There Is No Meaningful Tax Benefit

Investing in 401(K) plans does not mean reducing tax liabilities. But that is not the case. People usually ask, is 401k tax deductible? The answer is no. You do contribute tax-deferred money, but when you withdraw the money, you have to pay a certain amount in tax.

Apart from contributing tax-deferred money, people also might get a lower tax rate during their distribution in retirement.

However, many individuals feel that the federal government’s tendency to overspend will cause higher tax rates in the future. This will, as a result, reduce the investors’ withdrawal. However, this argument does not have much explanation to back it up.

The Company Match Out Is Taken From Employee’s Salary

Companies offer a certain portion of the 401k contribution to employees’ 401 fund that matches the employee’s contribution. It means the amount the company offers to the employee reduces the salary amount by the same amount.

Although this argument has some base regarding reduced salary, it does not explain why 401(K) are seen as scams. Employees can weed out this problem by being careful about the compensation package that includes salary, health insurance, 401(K), etc.

Employees Cannot Use The Money Until They Are 59½

This is, again, a baseless reason for concluding 401(K) a scam. Employees can withdraw the money, but they have to pay a penalty of 10% for that. However, there are also some ways to avoid the penalty. Employees can also transfer their 401(K) plans to other employers’ plans.

Are 401k Scams?

No, not really. The plan itself is safe and good enough for employers of any sort to save their money and invest in a long-term plan. But, there are selfish, desperate, and entitled people who can come up with fraudulent activities and think that it is okay to steal others’ hard-earned money.

Indeed, it is not your responsibility to be defensive about frauds related to 401(K). However, you can try different practices to avoid being scammed by others and save your 401(K) plan. It is not ok to steal others’ money.

Below are different ways that will allow you to stay safe from any scam happening to your 401k account.

Tips To Avoid 401k Scams

It is not always possible to protect yourself against all the different types of hacking. However, the steps provided below should help –

Stop Paper Statement

Everyone does not have a secure mailbox. You should stop paper statements. It will stop giving mail thieves a chance to find out where you are holding your 401(K) funds, your account number, and how much you have stored.

Use Online Access

You will not stay on top of things just by checking in once or twice a month. When you do not have online access to the 401K funds set up, you cannot check the account activity regularly. It is only when you get a quarterly statement you will get online access. However, that is not enough for you to stay on top of things.

You Can Use A Difficult Password

You can take help from a reputable password management service. This will help you secure store and keep track of all the data and passwords in one place. A password management system also helps you set up strong passwords.

Use Two Factor Authentication

You can also set up two-factor authentication to secure your 401k account. Apps like Google Authenticator can generate a unique code that changes every thirty seconds. This gives little space for a scammer or hacker to get into your system and try any fraud.

When you enable two-factor authentication, you have to type in the number that appears only for 30 seconds to access your account data. This is unfortunate that too many brokerage firms do not have two-factor authentication.

They only rely on phone numbers and email addresses to generate OTP. Yes, this does not provide you with an optimal level of security. But this is more than having nothing to secure you.

Turn On Your Account Notification

When you have a 401k plan in any of the brokerage firms, you can choose to have notifications for your account. The brokerage firm should provide you with account information based on any recent activity related to the account. This notification can be a direct text message or email to let you stay on top of things that are happening with your account.

Sometimes you will be able to know about the latest contribution made or the withdrawal from the 401k. This will definitely let you stay safe from any 401k scams.

Keep Your Eyes And Your Ears Open

Scammers are always using different ways to scheme their way into your funds and accounts. If you keep your eyes open and follow recent activities of scams and how they are doing, you can smell the problem from far ahead. Some examples would be blocking suspicious phone calls or not opening texts with links that want your attention. If you stay aware, it will help you avoid any such activities.

The scammers take advantage of the lack of knowledge on the investors’ part, and they carry out all these fraudulent activities. However, if they keep all these things in mind, the defense against fraud will seem better.

Bottom Line

Although there is too much confusion regarding 401(K) plans, people have been contributing safely to their 401k Funds. Yes, there are a few 401k scams, but one can tighten their security and carefulness to avoid them.

However, the plans themselves are far from a scam, and it is one of the most convenient ways to secure one’s retirement after a certain age. I hope that this article was informative. Please share your feedback regarding the same.

Read Also:

• What Happens To Your 401k When You Leave A Job?
• How To Find Old 401k Accounts And What To Do Next?
• 401K Loans: Reasons To Borrow, Plus Rules And Regulations