By Beth Pinsker
The social media site is full of arguments against contributing to workplace plans, mainly in favor of (made to order) life insurance products.
On TikTok, Gen Z’s go-to social media site, a new thread of retirement advice is taking root that runs counter to decades of financial planning, and it’s got money experts worried.
Using the hashtags #money, #401(k) and #retirement, some influencers on the site are claiming that the 401(k) is a scam – and, more worryingly, that there is a better retirement solution. And it’s a hill they’re willing to die on.
What would they prefer you to do? Essentially, the bottom line is to take any tax-deferred contributions you might make above your business match and put them toward variable life insurance policies of some kind or another one. One of the most popular suggestions is indexed universal life (IUL), which is a type of cash value life insurance policy in which you pay premiums to build value based on the performance of the life insurance policy. S&P 500 index or similar measure. Another is called Maximum Premium Indexing (MPI), which is a kind of hybrid life insurance and retirement plan that is billed as an alternative to Roth IRAs.
These types of products are of course sold on commission and publications about them do not always constitute public awareness campaigns. The proliferation of these messages has angered financial advisors, who believe that this is bad advice that prevents the good messages from getting through.
“It makes you want to bang your head against the desk,” said AJ Campo, a CPA whose firm is based in New Jersey and who participates on social media through LinkedIn chats, Facebook and #taxtwitter. “TikTok is full of horrible information.”
What’s the problem with the 401(k)?
The general argument against tax-deferred saving in workplace retirement accounts primarily concerns restrictions – contribution limits; limited investment choices within plans; rules for accessing money before age 59½ (unless you benefit from a hardship withdrawal or a loan); taxes on withdrawals; and required minimum distributions at retirement age. The Money Mom, for example, says: “The 59 1/2 rule, I will never agree with that.”
There are indeed legitimate concerns about 401(k) plans. Financial professionals regularly debate the value of target date funds, which are widely used in 401(k)s, because of their high fees and different investment management strategies. Congress and the IRS are also constantly changing the rules with legislation such as the Secure Act and Secure 2.0. So it’s obviously an imperfect system that can be changed.
But these influencers are tackling the idea of tax-deferred savings, as well as the value of consistently saving in a separate account for retirement. The videos make tax-deferred savings seem old-fashioned, slow and worthless, even though such plans are considered by most experts to be the cornerstone of a good retirement strategy. The life insurance products they promote instead offer promises of getting rich quick.
But any form of variable life insurance involves a complex contract that comes with high fees and investment management concerns. There are also rules for accessing money, as well as tax issues. This is not a product that is suitable for all situations, so people should read the details carefully and discuss the suitability of the investment with a fiduciary professional – meaning the advisor is required to work to their best interest and is not concerned. about their own commission.
“It’s bull–, complete bull–,” said Ramit Sethi, founder of the advice empire I Will Teach You To Be Rich. “The number of scams involving whole life insurance, indexed universal life insurance and all their associated cousins – it’s hard to believe.”
Why misinformation reigns
However, becoming popular on TikTok doesn’t depend on who is more right. “If you want to make a viral video, you’re attacking someone’s sacred cow,” said Brad Klontz, a financial psychologist and certified financial planner. And you do this by putting on makeup or using another visual gimmick while you talk to the camera.
Klontz said he believes his credentials, which include eight books and decades of experience, actually work against him in areas of social media geared toward quick hits to attract younger viewers. “I’m a doctor, and it really hurts you on TikTok,” he said. He now creates videos for the site, trying to figure out how to counter the misinformation circulating.
“You have to be convincing and build relationships,” Klontz said. “I know a lot of really good financial influencers who are spreading good messages, but it has to be interesting to watch.”
One of Klontz’s most successful videos was not about a financial topic at all, but about a study technique for young people. Another was a video that followed her young son walking through a casino, with the message: “My son is only 9 years old and he already knows that the ONLY people who lobby luxury brands on social media are broke and insecure.”
“You’ll be poor forever if you have that mindset. But I have to take my message and make it interesting, so I don’t sound like a professor,” Klontz said.
Campo said he wished Klontz and others like him well. “You could have a full-time job on TikTok dispelling misinformation.”
More from Beth Pinsker
If Robinhood disrupts the retirement industry, it won’t be because of meme stocks and crypto, but because of heavy-handed long-term investment strategies. Ramit Sethi’s 5 lessons on how to get rich – from his new Netflix series. TikTok and Reddit are obsessed with this financial question about inflation
-Beth Pinsker
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09/30/23 1609ET
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