Grant Cardone: The 401K IS A SCAM?!

What's up you guys, it's Graham here. So, I was watching this good old uncle Grant Cardone the other day, and I came across a video he made: "What is a 401(k)?" I figured, you know what? Let's give it a shot; let's see what he thinks, and maybe I can learn something new. Watch this.

Today, I'm gonna reveal some things to you about the 401(k), and I also made a video myself, about eight months ago, of exactly what a 401(k) is, the benefits of using it, and I also invest in a 401(k) with money I have left over after investing in real estate. I feel like it's just an important component of a well-rounded retirement portfolio.

Now, for those of you that don't know, a 401(k) is basically just a type of retirement account where the money you invest in that account is deducted from your total earned income, and because of that, you end up paying less taxes. Therefore, you end up having way more money to invest with. Then, when you reach the age of 59 and a half, you could begin withdrawing the money. At that time, you would pay taxes on the money you withdraw.

So, the advantage here is that, again, you have a larger amount upfront to work with because you don't pay taxes on that money. You just end up paying taxes later on, but you have a larger amount working for you from the very beginning.

So, with that said, let's get into it and see what he has to say about it. Who's looking more buff, though, man? Who's looking more buff? I mean, let me get that. You got your little bit more cut out than me, huh? You're more cut out than me.

Hey, I've got a wish! Okay, but this can't be it, right? Let's keep going a little bit further in. Sudi has to say the 401(k) is probably one of the greatest scams on the American public ever in the history of the United States. Wait, did I hear that correctly? It's a scam? But the 401(k) was created by Wall Street. It was sold to politicians. Politicians were then told, "Hey man, we will support you if you can get this thing pulled off."

Okay, okay, so let's clear this one up really quick. The 401(k) was really started by a group of individuals from Kodak who approached Congress and asked that part of the salary be invested in the stock market and therefore exempt from paying income tax. This resulted in section 401(k) being implemented in the tax code in 1978. From there, a benefits attorney named Ted Bennett took notice of this and proposed new rules allowing employers to offer this to their employees, which led to widespread adoption of the 401(k) in the early 1980s.

Now, I wouldn't say it's a perfect system, and modern 401(k)s can be a little bit tricky to navigate and have hidden fees in there, which could eat into your profits. But as long as you're aware of this and do your research ahead of time, this could be extremely beneficial for you to invest in long term as part of a well-rounded retirement portfolio. But to say it's a scam? Let's go a little bit further.

We want to get his money now, so we're gonna spin a story, okay, to the middle class. To say Jarrod's story starts young—everybody's heard that story. Start young, do a little bit every month. Man, dude, the whole story was built for Wall Street. It wasn't built for you and I. I can prove it.

Okay, who's gonna prove it first? Well, you can prove it, but I can support it, guys. They think he's actually right—it's actually a scam. We gotta be really careful out there. Kevin, you stay safe in Thousand Oaks. I give me right here in my studio. See, from all of this 401(k)s... What was that, guys? I think there's a 401(k) right outside! I think it found me.

Okay, okay. I mean, it seems a bit far-fetched to assume Wall Street created the 401(k) to steal all of our money. But let's continue watching and see his logic and facts behind what he has to say.

And then we can actually evaluate whether or not this is a valid concern for me to start a fund to let people invest in my fund. They have rules that say you have to be an accredited earner, okay? Which means, simply put, Robert can't invest in the deal yet because he doesn't earn 200 grand a year for two years in a row or he doesn't have a million dollars worth of net worth.

I mean, if you want to sell to unaccredited investors, you absolutely can. It's just you need to register the securities with the SEC. If you don't do that, you can still raise money, but only through accredited investors. I can't have somebody with 50 bucks a month do the deal. Why? Because Wall Street has a corner, a strangle on that deal. Stranglehold, okay? Because they want Jarrod, young Jarrod, in 18 years old giving 50 bucks a month.

The reasoning behind this is that usually the securities which are not registered with the SEC are inherently more risky than the ones that are, and therefore there are regulations in place to prevent people from investing money in something without the sophistication, diversification, or knowledge about what they're investing in. This is directly from the SEC website. These offerings, sometimes referred to as private placements, involve unique risks, and you should be aware that you can lose your entire investment.

So basically, if you're making $200,000 a year or more, or have a net worth above a million dollars, chances are you don't need the same protection as someone else. You might not have the same level of financial sophistication as someone who might not be fully aware of what they're investing in. But saying this is purposely designed to force people to invest elsewhere is a bit outlandish.

To me, honestly, it kind of makes sense. If you get rid of regulations like this, what's to stop someone like Carlos Mattos from opening up their own fund, allowing people to invest their entire life savings in it, and potentially risk losing everything? Yeah, let's keep going and see what Grant has to say.

Pitfalls of a 401(k) scam—you can be wiped out overnight. Yeah, this one is absolutely absurd. Now, just like any investment, there is risk associated with that, but saying you could be wiped out overnight is frankly a misleading scare tactic. The chance of you losing all of your money in a well-diversified stock portfolio, especially an index fund, is pretty much impossible.

What kind of retirement plan allows millions of people to lose 30% of their life savings just as they near retirement because of a change in the market? Okay, just like that. But sure, it could go down, just like any other investment. One could argue that even real estate—same thing. In 2009, real estate was hit just as hard as stocks were, and I was buying real estate for 25 cents on the dollar from what they were selling for in 2006.

Plus, if you're going so far as to say that you could be wiped out overnight in the stock market, something that disastrous would have implications on other markets as well. But let's actually take it a step further here and actually look at the facts and see the worst performing years ever in the history of the stock market.

In 1931, after the Great Recession, the markets dropped 47%. Then, again in 1937, the markets dropped 38% after the market already rallied 70%. Then again in 1974, the markets dropped 29%. And again in 2002, the markets dropped 23%. And in 2008, the market dropped 38%. Those were the worst drops over the last 118 years. But guess what? Over the last 118 years, regardless of these drops, the market still returned just above 11% per year.

So, I'm still trying to find evidence that you could be wiped out overnight because in history, that has not happened. And by the way, this is not unique to the 401(k) whatsoever. This is the entire stock market we're talking about here. So by his same logic, you shouldn't invest in stocks because the entire market could be wiped out overnight.

How can you hustle when you don't know where your money is? Stay with us, GCTV. But let's play his game here and just take his example and say that you're one day away from retirement. The next day, the market drops 30%, even though that's never happened in the history of the stock market. Let's just assume it does.

I mean, realistically, because you're a day away from retirement, you've already rebalanced your portfolio away from equities and into safer investments, like bonds. So even in this case, if the markets turned, you might not lose 30%. You might lose more like 10 to 15%. Which is still a lot, but again, it's not as bad as what he makes it seem.

But let's just take it a step further and assume that you have 100% in stocks, and the day before retirement the market drops 30%. Well, first of all, because this is your retirement, you're not going to be spending all of it and selling all of it on the day you retire. This isn't how it works; you don't cash out all at once on the day you retire. Instead, you only withdraw the money that you actually need in retirement, which could be $20,000 a year, $30,000 a year, or $50,000 a year.

And you leave the rest in the account to continue growing. If you go back to the chart we just looked at, you'll notice that after every downturn, the market usually corrects by 20% to 35% over the next following years. This means that if you just hang on for an additional few years, chances are your money is going to recover. A short-term loss does not mean long-term disaster.

Even after the 2008 stock market crash, at its peak, the S&P 500 was trading at fifteen hundred and sixty-one dollars. Then, just ten years later, the S&P 500 was trading at twenty-five hundred and forty-nine dollars. And that is, you guys, a 65% return or 6.5% annually, even if you bought at the peak right before the crash if you just held on.

But let's keep watching and see what else they have to say. All the math that breaks down with 401(k)s that I could find says, “You're gonna get 6-10% a year.” God forbid, you know, anything crazy happens in the stock market that pulls the rug out from underneath.

You know, I agree with this; this is about right. Depending on the fund you invest in, you could get between 6% and 10% annually, depending on how aggressive you are. The biggest consideration to watch out for is how high the management fees are, and the higher the management fee, the less return you're going to see.

This could make the difference between getting a 6% return or a 10% return, especially if you're paying one to one-and-a-half percent annually just in management fees. Having high fees is one of the biggest downfalls of many 401(k) plans that you really do need to watch out for.

And Marlow's asking this question perfectly: "What about tax savings and employer contributions?" So, that's good! That's how they sold you, Daniel. "We're gonna make a contribution, we're gonna match, we're going to give you a deduction—we're not gonna charge you for what it grows over 30 years, okay? We won't bill you or charge you taxes until you get out."

But watch what Jarrod did instead. So, I gotta say this is probably one of the most important parts of the entire video. If your employer offers an employer match in the 401(k), absolutely always take it! This is free money! Many employers will offer a dollar-to-dollar match on whatever money you contribute in the 401(k) up to a certain amount.

So, if you invest a thousand dollars, this means that your employer will match you an extra thousand dollars. This is a free 100% return on your money! I have no idea why anyone would ever turn this down. This is free money!

Always take it. Think of it this way: If you're walking in the middle of nowhere and you look down and there's a $100 bill and there's no one around for miles, would you pick it up? Yes! Treat the employer match in the 401(k) the exact same way—it's free money!

So, I put, instead of capping myself out at 18,000 and then trying to figure out where to put my money next, I took all of my money and put it in the real estate business. There are real estate deals.

No, I don't disagree with this part. Even though I have an IRA and a 401(k), I invest the majority of my money in real estate and then invest in those with whatever money is left over. It's just a different investment strategy.

It's a difference between putting in a lot of work upfront to create cash flow than doing something with stocks. It's a lot more passive with a lower barrier to entry. But I think the really subtle message here is that Grant is secretly pitching the advantages of his real estate syndicate over a 401(k) or other retirement strategies.

We're gonna write him a K-1 that says, “Hey Jared, your income was ten or twelve thousand dollars last year, but your taxes are probably a negative two thousand.” Yeah, so we get a lot of tax benefit from depreciation called depreciation. But Grant's reasoning here is that with his real estate syndicate, you get cash flow monthly versus a 401(k) where your money is really just tied up until the age of 59 and a half.

Now, on the surface, this is true, but there are two considerations here. If I'm to play devil's advocate, in Grant's fund you're investing with post-tax money, which means that your money has already been taxed before you even invest it. This means you have less money left over to invest with than pre-tax, which is where you don't pay taxes on that original amount.

No, even though Grant gives you a K-1 at the end of the year with the depreciation schedule, this is still done with post-tax money. Now, don't get me wrong, I'm not arguing against buying real estate with post-tax dollars because this is what 99% of investors do and what I do.

I'm arguing, though, in favor that there are advantages to a 401(k) that do need to be acknowledged, and there is a place for a 401(k) in a balanced retirement portfolio. Like in a 401(k), you put your money away, cash flow—you cannot receive a penny.

Yeah, so if you have a hundred grand or three thousand or six hundred a month going in, even if it pays you five or six or seven or eight, I don't know, what are some of the returns? Between six and ten percent? Ten percent? You don't get the money! How can you eat if you don't get the money?!

Now what Grant says here is right; a 401(k) is terrible for cash flow. But you don't invest in a 401(k) for cash flow. You invest in it to supplement other retirement accounts that you have. And again, like I mentioned, you have more money upfront to invest with because that amount brings down your initial taxes.

So, in 2009, Sherry, an executive at the company she works here, now she had a bunch of money in a 401(k). She was in the mortgage industry. Yeah, the industry got decimated—just wiped out, right? So she's without a job. Yep. What does she need now? Money! She can't get a job.

Yeah, that industry just got hit like a tsunami! Yeah, no, this is the importance of saving up for an emergency fund to draw from when you really need it. But also, how easy is it to pull out of your fund in the event you need the money? Or any piece of real estate, for an example? And I imagine it would be the same just for about any market.

If the market drops, you end up getting market value when you need to sell it. No, I will give Grant this—a 401(k), you're not gonna be seeing any monthly cash flow like you would in real estate. And you will have to pay a 10% penalty for having early access to a 401(k).

But when things are terrible and you have to sell something, you're generally gonna get less money at the end of the day than someone who can weather the storm and just hold on for the market to correct. And with a 401(k), you have additional money at your disposal because you didn't pay tax on that original amount.

The penalty is not terrible. The penalty is not terrible. You pay double tax on 10%—no, no, you've already paid taxes. Wait, let's listen to that one again. No, no, you've already paid taxes.

Dude, you do have to pay taxes. My friend is 100% correct. The money you put in a 401(k) is not taxed. That's the whole advantage to this. So when you take your money out, you do have to pay taxes at that time.

No, no, you've already paid taxes! But what's the chances taxes are gonna be higher? 30% or higher? That gets upon withdrawal. Total—we know taxes are going up. I don't care what these politicians tell you; they're gonna tax you, folks! It's happening!

Well, I mean, right now the tax rate actually ended up going down, so for anybody who's pulling from a 401(k) now, chances are, all things being equal, they're paying slightly less in tax. But I do agree we have no idea what the tax rate is gonna be in the future. It could be way higher; it could be the same; maybe it's a little lower. We have no idea.

But for the way I see it, it's all about diversification—from having a Roth IRA, a 401(k), and other outside investments to hedge your bet no matter what happens. Okay, let's talk to Shane from York, Pennsylvania. I can tell you all about this 401(k).

Come on, man. No one—okay, there's nothing—but it's tragic. It's pretty obvious here that Grant and his show pre-screen callers accordingly to fit with whatever viewpoints they want to get across. I mean, that 401(k) is nothing but a dream.

Yes, your own dream. Then don't let your dreams be dreams! But here's the thing: no matter what you believe in, you will find other people who believe the exact same thing. This sense of creating an echo chamber of people who believe a certain topic to be true, and because of that, they seek out other people who align exactly with that viewpoint, just furthering the belief that whatever they believe in is true.

Hence, exactly why they're able to get callers like this with such extreme circumstances. "Take your money out of your 401(k); go buy yourself some real estate or invest itself; it's a 401(k); it's just a trap!" Yes! Now, let's say I go buy a $300,000 house or about $300,000 worth of T-shirts—which one do you think I'm gonna make more money?

Okay, and this part makes absolutely no sense to me. Oh, no way, dude! I'll make more money on my T-shirts, man! I can sell! Yeah, you can't sell your house tomorrow! And then, look, by the way, how the caller immediately changes his viewpoint as soon as Grant contradicts, and he's like, "You can't sell your house tomorrow?"

Yeah, man! Now I could see it; now the shirts are a better investment. Yeah, but Grant’s right about this: you’re not gonna sell a house in 24 hours. Realistically, it’s gonna take you about seven days at the very least.

But with a 401(k), you can pretty much sell it at any time you want for whatever market value is at the time. The 401(k) is going to buy a bunch of water, but you can't drink it for 30 years! It's like buying vegetables from the store, but you gotta wait for 30 years, and they gonna be how nasty?

Well, not really. The way I see it, it's like having water that continues to grow over time. By the time you retire, you have an entire lake full of water to drink from rather than just a gallon. Or it's like planting a seed that eventually grows into an entire farm full of crops rather than having just a single vegetable.

It's really about growing your money up long-term for retirement rather than spending it immediately. I'm glad you're on the 401(k) ass-kicking because I come from experience with 401(k) stuff. I was in the corporate world for a long time, and in 2000, when the market blew up, I lost 90%. Literally, over a 90%.

If he lost 90% and he was invested around that time, it sounds like he had zero diversification whatsoever and went pretty much all in on dot-com stocks, which took a huge hit. This would have happened whether or not his money was in a 401(k), and it's at no fault whatsoever to the 401(k).

Had he just invested in a diversified index fund and just held, he would have been just fine today, and that's why he lost 90% of his money. That's why Wall Street doesn't want me doing the deal because I would become competition!

Yeah, their funds, and they wouldn't get three trillion—three trillion! Do you understand? There's three trillion dollars in mutual funds, and a 401(k) sits trapped! This isn't why they don't want you to do it. It's not that they have three and a half trillion dollars trapped in a 401(k).

There's three and a half trillion dollars in a 401(k), but it's not trapped, and people can pull out at any time they want. And the money isn't necessarily trapped in the 401(k) either; it's often invested in bonds, stocks, REITs, and many other options out there for folks.

Like, I don't even know what a 401(k) is, man! Like, I just—I knew I heard about it in school. So, wait a second, if you don't know what it is, how do you know it's a scam? These are traps. Yes, they're traps, man! They're traps.

Okay, so here's the moral of the story from my perspective, and as always, I try to be as neutral as possible. And I just look at the facts and analyze them. How I interpret them, the 401(k) is a fantastic part of a well-diversified retirement portfolio, allowing you to save money upfront on taxes and allowing you to have more money up front to invest with, to let it grow even more over time.

This should not be the only thing you invest in for retirement, and it should not be the only thing you rely on for retirement. But it’s absolutely not a scam from any way that I see it. The only thing to watch out for is that many employers will offer extremely complicated or really expensive 401(k) plans to choose from.

For instance, if you're paying a 1% management fee on an actively managed account that underperforms the stock market adjusted for inflation, that means you're maybe only making a few percent per year. And at the same time, you're tying up all of your money until the age of 59 and a half. This can be terrible.

Many companies have been under fire recently for secretly profiting from your 401(k) plan by getting other services rendered for free from that same company, and that company makes up the money with really high fees in your 401(k) plans. Now, this certainly isn't the norm, and it doesn't happen very often.

But oftentimes, for employers, they don't care what the management fee is on your fund because it does not affect them at all. It just affects your bottom line. So, it's really important that any time you look at a 401(k), you understand what the management fee is and then decide from there whether or not it's actually worth it.

For instance, I pay 0.04% management fee annually through Vanguard, and the average management fee overall is 0.97%. This is over 2400% higher than what I pay, and that, you guys, is absolutely absurd.

So, my biggest recommendation here is that if your employer offers a 401(k), look into it and look at the management fee to decide whether or not it's actually worth it to invest in. If your employer offers what's called an employer match, where they match dollar for dollar up to a certain amount, it's almost always worth it to contribute up to that certain amount so you get your employer match because, again, like I mentioned, that's pretty much free money!

And yes, even though it is true that I invest the vast majority of my money in real estate, I do have an IRA and I do have a 401(k), so I have as many different options to utilize as possible. And for any of you curious, what I have is a Roth IRA that I set up many years ago, where my money just grows completely tax-free into the age of 59 and a half.

At that point, I can just take out all of that money tax-free. I also have what's called a SEP 401(k), where I invest whatever money I have left after investing in real estate, and that just helps reduce my taxable income. And then, of course, I have real estate, which has been my main focus all along.

They each have their own advantages and they each have their own drawbacks, but from the way I see it, none of them are a scam except for BitConnect. So, as always, you guys, thank you so much for watching! I spend a lot of time on this video, so if you like it, if you want to see more like this, it really does help! Hit the like button!

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