Home Well-BeingPersonal Finance The Great Lie Of the 401(k)

The Great Lie Of the 401(k)

by Dr. David Phelps

Most practitioners have no idea that today’s 401(k) retirement model was largely an accident. It was never intended to be the bedrock of American retirement planning.

A Brief History

In 1978, Congress passed a bill they thought would put the brakes on high-paid executives abusing the perks of cash-deferred plans. It added an obscure 869 word section to the Internal Revenue Code (called “Section 401(k)”) written by an unknown 29 year old junior attorney. Nobody had any clue that history was being made.

But it came at a pivotal time. The retirement landscape was shifting. For decades, large companies had been offering generous defined benefit pension plans to “lifer” employees. But companies saw the writing on the wall. The crushing cost of guaranteeing a cushy retirement was unsustainable. They saw the 401(k) as a chance to shift the responsibility for retirement planning onto employees. And so, within a few years, that 869 word section of the Revenue Act of 1978 became the cornerstone of American retirement planning.

According to a recent article in the Wall Street Journal – “Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence as the dominant way most Americans save. Some say it wasn’t designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days.”

The Case Against The Modern 401(k)

The primary advantage touted by advocates of traditional 401(k)s is the opportunity to defer taxes on the dollars you are earning today. But at what cost? You are putting hard-earned money into a lock-box you can’t open until you’re 59.5 years old. If you try to access that money early, you’ll get slapped with a penalty and taxes.

Even worse, for most practitioners, because you have office employees, you can’t personally manage that money. Your office 401(k) has to be handed over to somebody else who will manage it for you. A third party – called a fiduciary.

So yes, you do get to kick the tax can down the road, but only if you surrender the money to suits on Wall Street for decades and hope for the best.

Wealth is useless if you have few options and little control. It becomes little more than numbers on a spreadsheet.

The Broader Problem – The Commoditization Of Wall Street

Whenever I tell practitioners that I’m not a fan of the 401(k), they stare back at me with glazed eyes. “How can you say that? That’s the first thing that we’re told to do.”

True. But by who? By suits on Wall Street? Welcome to the future. “Investing” is just another industry selling products to anyone that will buy them. Flashy new financial products are hitting the market every week. Apps and tech startups are taking “investing” to the uneducated, financially illiterate masses. There are massive fortunes made selling Wall Street to main street.

“Financial Advisor” is often just a fancy title for “salesman”. Candidly, most financial advisors aren’t any closer to financial freedom than the clients they are trying to help.

Ultimately, 401(k) retirement plans are sold in bulk as commoditized financial products to practitioners who don’t have the time, interest, or financial acumen to orchestrate their own wealth for themselves.

If Not 401(k)s, Then What?

There are countless ways to invest outside of traditional Wall Street constructs. The key is to learn to orchestrate your own capital. I am a huge advocate for investing in capital assets. Investing in capital assets can take many different forms, it offers a host of advantages over the “paper” assets of Wall Street.

Investing In Your Business As A Capital Asset

If you haven’t figured out how to invest money in your own practice and create good returns, you need some help transforming your practice into a real business. Your practice is your #1 asset. If done properly, it is an investment that will give you:

• Better returns.

• Better tax advantages.

• Better control.

And you can enjoy the fruits of all of this now. Not when you’re 59.5 year old.

Real Estate As A Capital Asset

Real estate has long been the preferred investing vehicle of the world’s elite. If done properly, investing in capital assets like real estate can create massive tax advantages, cash-flow, and the security of owning real, physical assets – not paper on Wall Street.

Did you know you can own real estate through a self-directed IRA? If you take the money tied up in your 401(k) “prison” and invest it in a portfolio of cash-flowing real estate assets, you can enjoy the tax advantages of an IRA retirement account while still maintaining control of your wealth.

“The great lie is that the 401(k) was capable of replacing the old system of pensions. It was oversold.”

Gerald Facciani (Former head of the American Society of Pension Actuaries)

Freedom = Responsibility. Are You Willing?

Controlling your wealth is the first step toward financial Freedom. If you want to orchestrate your own wealth and control your financial destiny, that’s not going to happen with a cookie-cutter office 401(k).

Unfortunately, most of our colleagues may opt for the easy road and buy whatever their financial advisors sell them. Sadly for many, this “easy” road isn’t going to create financial Freedom.

For those that are willing to take ownership and orchestrate their own wealth, the road less traveled leads through a land rich with opportunity.

I’ve always preferred the road less traveled.

How about you?

Dr. David Phelps


A former practicing dentist, today David Phelps is a nationally recognized speaker on creating freedom, building real businesses and investing in real estate. He authors a monthly newsletter, “Path to Freedom” and hosts “The Dentist Freedom Blueprint” podcast. The Freedom Founders Elite Mastermind Community provides the pathway to freedom for professional practice owners.


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