401(k) vs. Brokerage Account: Which Is Better for Retirement Savings? Plus, the National Debt Explained

Summary

Episode Summary: 401(k) vs. Brokerage Account: Which Is Better for Retirement Savings? Plus, the National Debt Explained

Podcast: NerdWallet's Smart Money Podcast
Host: Elizabeth Ayoola and Sean Pyles
Release Date: April 3, 2025
Guests: Ana Helchi (Money News Rundown), June Sham (Investment Expert)
Duration: Approximately 18 minutes

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Introduction

In this episode of NerdWallet's Smart Money Podcast, hosts Elizabeth Ayoola and Sean Pyles delve into two significant financial topics: the overwhelming national debt of the United States and a practical listener question regarding retirement savings options—specifically comparing a 401(k) plan managed by an insurance company versus a personal brokerage account.

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Segment 1: Understanding the National Debt

[00:00 - 09:08]

Elizabeth Ayoola opens the episode with a light-hearted yet sobering introduction about the U.S. national debt, highlighting its magnitude of $36.2 trillion. She sets the stage for an in-depth discussion on how the debt accumulated, its implications for personal finances, and the potential future outlook.

Key Discussion Points:

1. Definition and Scale of National Debt:

   • Ana Helchi explains that the national debt is the total amount the U.S. government has borrowed and not yet repaid. It's currently $36.2 trillion, which equates to approximately $106,000 per citizen.
   • Economists assess the debt relative to the Gross Domestic Product (GDP), with the current debt-to-GDP ratio standing at 123%.

2. Causes of the Growing Debt:

   • Increased government spending and lower tax revenues have been primary contributors.
   • Significant events like the Afghanistan and Iraq wars, the 2008 recession, and notably, the COVID-19 pandemic, which saw a 50% increase in spending from 2019 to 2021.
   • In the first Trump administration, broad tax cuts reduced federal tax revenue, exacerbating the debt.

3. Ownership of the Debt:

   • Publicly Held Debt: Comprising about 80% of the national debt, held by the American public, foreign governments (with Japan as the largest holder at over $1 trillion), and various financial institutions.
   • Intra-Governmental Debt: The remaining 20%, which includes interdepartmental funds like the Social Security Old Age and Survivors Insurance Trust Fund.

4. Future Projections:

   • The Congressional Budget Office predicts an increase of $23.9 trillion in the national debt over the next decade.
   • Fiscal challenges include a projected $1.9 trillion deficit in fiscal year 2025.

5. Implications of High National Debt:

   • A high debt level can undermine economic confidence, influence consumer and investor behavior, and constrain policy decisions.
   • Potential consequences include higher interest rates, reduced economic growth, and possible increases in taxes or cuts in essential programs.

6. Debt Ceiling vs. National Debt:

   • The debt ceiling is the legal limit on the total amount the government can borrow to meet its obligations.
   • As of the episode, the debt ceiling stands at $36.1 trillion, and the U.S. is projected to default on its debt by late May if Congress doesn't act, potentially triggering a global financial crisis.

Notable Quotes:

• Ana Helchi [01:03]: “The national debt is the sum total of all the money the United States government has borrowed but has not yet repaid.”
• Elizabeth Ayoola [07:05]: “If the US doesn't have the revenue it needs to offset more of the debt, then interest on the debt just grows, which could lead the US to borrow more, increase taxes, or cut spending on programs that people and businesses rely on.”

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Segment 2: Listener Question - 401(k) vs. Brokerage Account

[09:13 - 18:38]

In the latter half of the episode, Sean Pyles addresses a listener's query submitted via voicemail. Vicki is contemplating whether to invest in her employer-provided 401(k) plan, managed by an insurance company without an employer match, or to opt for a personal brokerage account.

Listener's Question:

"I have a 401k eligible through my employer, but it's with an insurance company and they do not give a match. I read through the paperwork and the insurance company that it's through can change their pricing, their fees at any time and they don't even have to tell the customer about it. I'm not crazy about the fund that they offer, but I'm wondering if it's better to put money into the 401k or just do a brokerage account on my own."

Expert Analysis:

June Sham, an investment expert, joins the discussion to provide clarity on the advantages and drawbacks of both retirement savings options.

Key Discussion Points:

1. Role of Insurance Companies in Managing 401(k)s:

   • 401(k) plans can be administered by various financial institutions, including insurance companies.
   • June Sham [11:23]: “Whether a 401k plan is managed by an insurance or investment company, their role is the same.”

2. Transparency and Fee Management:

   • Concerns about fee changes without notification were addressed.
   • June Sham [12:04]: Retirement plans are required to disclose fees and expenses initially and annually, with quarterly statements provided to participants.

3. Advantages of 401(k) Plans:

   • Tax Benefits: Traditional 401(k) contributions are pre-tax, reducing taxable income, and earnings grow tax-deferred.
   • Roth 401(k) Option: Contributions are post-tax, but withdrawals in retirement are tax-free.
   • Even without an employer match, tax advantages make 401(k)s a compelling option over taxable brokerage accounts.
   • June Sham [12:49]: “Any gains from investment earnings, dividends and interest don’t incur any taxes until you make withdrawals in retirement.”

4. Drawbacks of 401(k) Plans:

   • Limited control over fees and investment options.
   • Early withdrawals may incur taxes and penalties.
   • June Sham [13:53]: “Because a 401k is meant to be invested for long term growth, early withdrawals before retirement age may come out with taxes and penalties.”

5. Advantages of Brokerage Accounts:

   • Greater flexibility with no contribution limits or employer constraints.
   • Access to a broader range of investment options.
   • Funds can be accessed at any time without penalties.
   • Absence of required minimum distributions (RMDs) allows funds to remain invested indefinitely.

6. Considerations When Choosing Between 401(k) and Brokerage Accounts:

   • Fees and Investment Options: Lower expense ratios and a diverse range of investments in a 401(k) can be advantageous.
   • Contribution Limits: 401(k)s have higher contribution limits compared to IRAs.
   • Financial Goals: Utilizing both accounts can diversify retirement savings strategies.
   • June Sham [16:26]: “All three accounts serve different purposes and goals and all can be part of a solid financial plan.”

7. Real-World Example:

   • Sean Pyles shares his personal experience comparing his 401(k) with an expense ratio of 0.08% versus a Robo Advisor Roth IRA with an expense ratio of 0.25%, emphasizing how fees can significantly impact long-term savings.

Notable Quotes:

• June Sham [12:49]: “Any gains from investment earnings, dividends and interest don't incur any taxes until you make withdrawals in retirement.”
• Sean Pyles [15:53]: “Investment options and fees are the two main things that people should weigh as they compare retirement investment options.”
• June Sham [17:37]: “All three accounts serve different purposes and goals and all can be part of a solid financial plan.”

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Conclusion

The episode effectively balances macroeconomic concerns with personal finance advice. While the national debt poses significant long-term challenges for the U.S. economy, individual listeners like Vicki are empowered to make informed decisions about their retirement savings. By understanding the benefits and limitations of 401(k) plans versus brokerage accounts, listeners are better equipped to strategize their financial futures.

Final Takeaways:

• National Debt: Awareness of the national debt's scale and its potential economic impacts is crucial for understanding broader financial policies and their implications on personal finances.

• Retirement Savings: Even in the absence of employer matches, 401(k) plans offer substantial tax benefits that can outweigh the limitations in fees and investment options. However, supplementing with a brokerage account can provide greater flexibility and diversification.

Call to Action:

Listeners are encouraged to send their money questions via voicemail, text, or email to continue receiving tailored financial advice from NerdWallet’s team of experts.

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Production Credits:
Produced by Tess Vigeland
Editing by Hilary Georgie
Audio Mixing by Nick Karasimi
Special thanks to NerdWallet's editorial team.

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This summary is intended for informational purposes and does not constitute financial advice. Always consult with a financial advisor for personalized guidance.

Transcript

[Elizabeth]

Confession time. How much debt are you carrying right now? If you don't want to share the details, can you at least confirm it's not trillions of dollars? Well, the US government cannot say that it's currently more than $36.2 trillion in the hole. And today we're going to hear how that happened, how serious it is, and what it means to our personal finances. Welcome to Nerd Wallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. Sean will join us in the later half of this episode where we're answering a listener's question about investing in their 401k accounts and whether it's cool that an insurance company is in charge of managing it. But first, our weekly Money News roundup, where we break down the latest in the world of finance to help you be smarter with your money. Our news colleague Anna Helchi is here to talk about the large financial hole the country is in and what it means for all of us. Hey, Ana.

[Ana Helchi]

Hey, Elizabeth.

[Elizabeth]

We're going to be answering two listener questions today, and this first one is asking for a bit of an explainer. They wrote, hi, nerds. Could you attempt to explain how we got into trillions of dollars of national debt? When was the last time we were in a surplus? Who exactly are we in debt to? Thanks. So, Ana, where do we even begin with this subject? It's really hard to wrap my brain around that figure I mentioned earlier, $36 trillion. How does the government rack up that kind of debt?

[Ana Helchi]

It's kind of unbelievable. But let's start with what the national debt is, and then I'll explain how we got to where we are now. So the national debt is the sum total of all the money the United States government has borrowed but has not yet repaid. Like you and me, the government earns and spends money, but of course, its earning and spending is pretty different than ours. The majority of the federal government's earnings are made through tax revenue, and it spends money on programs and services for US Citizens. And like most debts, it has to pay the interest, too. As you mentioned, the total national debt right now is $36.2 trillion. But that's the kind of number that is so enormous that it practically loses its meaning.

[Elizabeth]

It feels too big to comprehend.

[Ana Helchi]

Exactly. And when you break down that number by how much money it owes per Citizen, it's around $106,000. That's maybe a little bit easier to wrap your head around, but it's not the way that economists prefer to think about the national debt. Instead, they compare the total debt against economic growth, also known as gross domestic product, to find out what the nation's ability to repay our debt is. In other words, our debt to GDP ratio. At the end of fiscal year 2024, the US had a debt to GDP ratio of 123%, which means the debt we owe is roughly 123% of our annual growth.

[Elizabeth]

That is not where you want to be. So how did the debt get to $36.2 trillion?

[Ana Helchi]

ANA so the national debt grows when the government spending and interest expenses grow faster than revenue can offset. Increased spending along with tax cuts have led to where we are now going. Way back in US History, we've often seen national debt spikes during Warsaw, the Revolutionary War, Civil war, World War I, and World War II in the last couple of decades. The government borrowed a significant amount during the Afghanistan and Iraq wars, as well as the 2008 recession. And the national debt has risen every year over the last 10 years. There are two big reasons why we arrived at that $36.2 trillion amount during the first Trump administration, we saw broad new tax cuts implemented, which meant that the federal government has been bringing in less tax revenue. And then spending increased significantly during the pandemic. From 2019 to 2021, spending increased 50%.

[Elizabeth]

So who owns the debt and what is the debt made of?

[Ana Helchi]

Its creditors own the debt. That includes the American public, foreign governments, other securities holders, and government agencies. The national debt is made up almost entirely of treasury securities. And there are two types. Marketable securities, so assets that can be bought and sold quickly, like bonds, bills or company shares, and non marketable securities. Financial securities that can't be easily sold, like US Savings bonds or shares of a private company. Now, those securities fall into two categories, publicly held debt and intra governmental debt.

[Elizabeth]

And then how do those shake out?

[Ana Helchi]

Roughly 80% of the national debt is publicly held debt. That's any federal debt held by entities outside the federal government. The remaining 20% is intra governmental debt, which is money that's essentially passed back and forth by government departments. As of now, the total outstanding national debt breaks down to 7.3 trillion in intergovernmental holdings and 28.9 trillion owned by the public.

[Elizabeth]

Can you explain more about the difference between the two?

[Ana Helchi]

Sure. So let's first break down publicly held debt. It's essentially money borrowed from outside lenders through financial markets. That includes the Federal Reserve System, mutual funds, state and local governments, depository institutions, pension funds, insurance companies, Foreign countries and other domestic holders.

[Elizabeth]

You just mentioned foreign countries. So which ones does the US Borrow from the most?

[Ana Helchi]

That'd be Japan at more than $1 trillion, followed by China and the UK and some other large debt holders are Luxembourg, the Cayman Islands, Belgium and Canada. In recent decades, we've come to rely more on foreign lenders than we once did.

[Elizabeth]

Now, what about intra governmental debt?

[Ana Helchi]

So this debt isn't a traditional debt in the way a public debt is. It's money that's shuffled around from one department to another in order to fund programs. But that money still needs to be tracked for the sake of accounting. An example of an intra governmental debt is the largest one, the Social Security Old Age and Survivors Insurance Trust Fund. And that's one of the funds that the Social Security Administration uses to pay benefit recipients.

[Elizabeth]

I think it's safe to assume that the national debt will grow. But what do economists projections show?

[Ana Helchi]

Earlier this year, the Congressional Budget Office projected that the national debt will increase by $23.9 trillion over the next 10 years. It also forecasts that the federal budget deficit in fiscal year 2025 is on pace to grow by $1.9 trillion.

[Elizabeth]

Ana, does the government ever pay off its debt?

[Ana Helchi]

It doesn't really pay it off, it just manages the debt. And debt can be offset by revenue. So bringing in tax revenue and issuing treasury securities. If people cash in enough treasury securities that it exceeds the total number sold, that can bring down the debt too. Budget surpluses would also reduce the debt, but the US hasn't had a surplus since the 90s during the Clinton administration.

[Elizabeth]

Can you tell me why national debt matters?

[Ana Helchi]

It matters because it affects the economy at large. It also influences consumer, company and investor behaviors, and it guides policy decisions. When the national debt is high, individuals and companies may lose confidence in the economy, and that can impact how they invest and spend. Declining confidence could also lead the Federal Reserve to increase interest rates or keep them high, which makes it more difficult for people to borrow. It could ultimately lead to lower economic growth, which as I explained earlier, will make it even harder to manage the national debt. And if the US doesn't have the revenue it needs to offset more of the debt, then interest on the debt just grows, which could lead the US to borrow more, increase taxes, or cut spending on programs that people and businesses rely on. It's basically a negatively reinforcing cycle.

[Elizabeth]

Well, I've seen the debt ceiling back into the news lately. Can you explain how it's different from the national debt?

[Ana Helchi]

They're related, but not the same. Again, the national debt is composed of money that's currently borrowed by the government plus interest on that debt. Meanwhile, the debt ceiling is the total the government can borrow in order to meet its legal obligations. That means funding for things like Social Security, Medicare, military salaries, tax refunds, and interest on the national debt. The debt ceiling, also known as the debt limit, is $36.1 trillion, and we hit that ceiling back in January. But the treasury is now taking, quote, extraordinary measures to keep legal obligations funded. But we're hurtling toward potential calamity. The US Is expected to run out of the money to meet its obligations as soon as late May. Now, if we get to that point, the US could default on its debt, and default would be catastrophic. And if it went on long enough, would plunge the US as well as the rest of the world, into a financial crisis. So Congress needs to act soon to avoid that default. I think we'll likely get deeper into this in a future episode.

[Elizabeth]

I'm pretty sure we will. Thanks, Ana.

[Ana Helchi]

You got it, Elizabeth.

[Elizabeth]

Up next, Sean is back to help answer a listener's question about whether it's worth contributing to a 401 without an employer match and without a lot of investment options, or if it's better to do a brokerage account on their own. But before we get into that, a reminder listener to send us your money questions. Leave us a voicemail or text us on the Nerd hotline at 901-730-6373. That's 901730 N E R D or email [e-mail] this episode's Money question is coming up in a moment. Stay with us.

[Sean]

We are back and answering your money questions to help you make smarter financial decisions. This episode's question comes from Vicki, who left us a voicemail.

[Vicki]

Hi Shawn, this is Vicki. I have a 401k eligible through my employer, but it's with an insurance company and they do not give a match. I read through the paperwork and the insurance company that it's through can change their pricing, their fees at any time and they don't even have to tell the customer about it. I'm not crazy about the fund that they offer, but I'm wondering if it's better to put money into the 401k or just do a brokerage account on my own. Thanks a lot.

[June Sham]

To help us answer Vicki's question on this episode of the podcast, we are joined by investing nerd June Sham. Welcome back to Smart Money, June.

Thanks so much for having me Again.

[Sean]

Hey, June. So I want to start by laying the groundwork for the conversation. Our listener, Vicky, has a 401k. It happens to be maintained by an insurance company. And Vicki isn't too happy with the plan and is wondering whether it's worth investing in at all. To start, I'm betting that some folks might not realize that a 401k can actually be managed by an insurance company, and it's not as sketchy as it might sound. So, June, can you describe the role an insurance company might play in managing a 401k and whether it's any different from another kind of financial institution like an investment company overseeing such an account?

[June Sham]

Yeah, it might be surprising, but 401k plans can be set up by different types of financial institutions, such as a bank, mutual fund provider, or, as in our listener's case, an insurance company. Whether a 401k plan is managed by an insurance or investment company, their role is the same. They're responsible for the written plan, which outlines the type of 401k plans offered, organizing a trust fund to hold the plan's assets, creating a record keeping system, and providing plan information to participants.

Vicki says that the insurance company can change the fees at any time without notifying the people who are actually in the plan. And to me, that doesn't sound right. What do you think is going on there? Because it's my understanding that retirement plans have specific disclosure requirements.

Yes, they do. Retirement plans do have to share plan information, which includes expenses and fees. The IRS calls these participant plan and investment fee disclosures. They're shared at the beginning of the plan and then at least once a year after that. You can also expect to receive quarterly statements that share information on how much was paid out from your account for a certain fee. What can make it confusing is that retirement plans do have to update participants regularly, but it might not happen with every change.

[Sean]

Our listener is considering not investing in their 401k at all, given that they don't get a match and they aren't wild about the investment options in the account. But there are still some serious advantages of investing for retirement in a 401k versus a regular taxable brokerage account. Can you lay those out for us?

[June Sham]

Yeah. It's unfortunate that our listener doesn't get an employer match for their 401k contribution, which is a really big perk for using a 401k to invest for retirement in the first place. But another big reason to invest for retirement in a 401k plan compared to A brokerage account is the tax advantages. If you have a traditional 401k plan, contributions are pre tax, meaning you can lower your taxable income for the year by adding to your account up to the IRS contribution limit. On top of that, any gains from investment earnings, dividends and interest. Don't incur any taxes until you make withdrawals in retirement. If you want to defer the tax break until later and it's available to you, you can consider a Roth 401 plan. Contributions are made with after tax dollars so you don't get a tax break upfront, but the money grows tax free and comes out tax free in retirement. With a brokerage account, you don't get a tax break for contributing and you'll owe taxes on dividends, interest and capital gains every year.

So June, it sounds like as you laid out, there are many benefits of actually contributing to a 401k, but can you think of any drawbacks of Investing in a 401k for retirement versus a brokerage account?

Yeah, there definitely can be drawbacks and our listener has pointed out a few limited control over fees and investment options. Additionally, because a 401k is meant to be invested for long term growth, early withdrawals before retirement age may come out with taxes and penalties. If you really needed money, you could also explore a 401k loan depending on your plan provider's rules. In comparison, you get to do your own research and choose your own brokerage account provider. And if needed, you can access your money at any time in the present.

And on the flip side, what might be some of the benefits of investing in a brokerage account over a 401k account?

We've named a few already and that includes no early withdrawal restrictions, contribution limits or employer constraints, and a lot more investment options. Another that some people might not think about is required minimum distributions, which are required for some IRAs and 401ks. With a brokerage account you can leave that money invested, but with traditional 401ks, you generally must withdraw a minimum amount from your plan every year starting at age 73. There are some exceptions and this rule does not apply to Roth plans.

[Sean]

I want to talk more about specific investment options that are available in retirement accounts because different accounts can have very different options and costs. In preparing for this conversation, I logged into my 401k account and saw that I have access to over 20 different funds to invest in and I'm currently invested in a Target date fund that will change my investments over time to become less aggressive the closer I get to retirement and the expense ratio, which is basically the administrative fee for the account, is 0.08%, which is pretty low. Then I logged into my Robo Advisor Roth ira which automatically determines my investments and saw that the expense ratio is 0.25%, which is a lot higher than 0.08 and can add up to a difference of thousands of dollars over the years. June, would you say that investment options and fees are the two main things that people should weigh as they compare retirement investment options? Or what else do you think people should consider?

[June Sham]

Yeah, those are two very important things to consider when comparing retirement investment accounts specifically for between a 401k plan and an IRA. Also consider the contribution limits and employer match for a 401k if you get that. If comparing Roth IRA accounts between providers, some other factors to think about could include account minimums, customer support, retirement planning tools, and maybe even how easy it is to use their desktop and mobile services. My team did a whole analysis on how to pick the best Roth IRA accounts in an article you can find on NerdWallet and we'll link it to the description of this episode.

So 401k accounts are sometimes critiqued because they may not have as many investment options as something like a self directed Roth ira for instance. But as Sean pointed out, we have over 20 different options in our 401k, which seems like a lot. Is that normal or are we just spoiled at Nerd Wallet? And when might it make sense to choose one retirement account over another based on the investments available?

We are a little bit spoiled. A Brightscope and Investment Company Institute study found that large 401k plans offer 28 investment options on average in 2019. In their How America Saves 2024 report, Vanguard shared that their average plans offered 27.5 investment options in 2023. When it comes to choosing an account based on the investments available, consider what is available in your 401k plan. If it only offers a handful of funds and the fees are high, such as an expense ratio over 1%, it might be worthwhile to contribute enough just to get the employer match and then prioritize an Iraq Well June, thanks for.

[Sean]

Going deep into the weeds with us this episode. Do you have any parting thoughts for Vicky or others who are trying to sort out different accounts and investment options for their retirement?

[June Sham]

Even though we've talked about a number of accounts today, you don't need to pick one over the others. Instead, remember that all three accounts serve different purposes and goals and all can be part of a solid financial plan.

[Sean]

All right. Well, June Xiaom, thank you so much for joining us on Smart Money.

[June Sham]

Thanks so much for having me again.

[Sean]

And that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-N E R D. You can also email us at podcastnerdwallet.com you can follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts and iHeartRadio to automatically download new episodes.

[June Sham]

And here's our brief disclaimer. We are not your financial or investment advisors. This nerdy information is provided for general educational and entertainment purposes and it might not apply to your specific circumstances. This episode was produced by Tess Vigeland. Hilary Georgie helped with editing. Nick Karasimi mixed our audio. And a big thank you to NerdWallet's editors for all their help.

[Sean]

And with that said, until next time, turn to the Nerds.