• EN (English)
Fatwa ID: 1871
Title: Investment in 401K
Category: Financial Transactions
Scholar: Dr. Hatem al-Haj
Date: 11/08/2006

Question
Assalam-o-Alaikum wa rahmatullah, Here in the USA where we work for companies there are retirement plans called 401Ks. This is where you invest in stocks and mutual funds and your employer matches the investment that you make by investing the same amount. Hence you invest twice the money that you personally invest. These stocks and mutual funds include all different industries including companies with halal and haram businesses. My question is, are we allowed to participate in such an investment scheme? My concern specifically is the dealings with the haram companies because you cannot pick and choose who you invest in. These haram companies include alcohol, tobacco, pornography and more, and hence the return on the investment that you get includes earnings from them. Is it permissible to take advantage of such a lucrative scheme? Can you just receive the income and dispose of the unlawful returns on investment? If you could state what evidence we use I would appreciate that.

Answer

All praise be to Allah, and may his peace and blessings be on the last and best prophet and messenger, Muhammad.

There are various types of pension plans. In some types, the company you work for matches your contribution or pays more towards your plan. Most of the scholars would allow you to take part in such plans and purify your money from the haram portion when you start to receive it. The reason why they allow it is to not loose the contribution of the employer, which will otherwise not contribute to your pension. This fatwa is based on istihsan (juristic preference), maslaha mursalah (consideration of public interest) and various fiqhi principals, including "Harm is to be availed as long as possible. ", "Trivial things are exempt." "Consequential matters are not treated with the same scrutiny as original."

If you decided to take part in these plans, then I would advise the following:

You should talk to the manager of your portfolio and ask him to help you choose mutual funds that have the least percentage of companies that deal in unlawful transactions. Sometimes you can even have an isolated portfolio in which you can select the companies you take part in.

When you start to get the pension, you should purify it by spending in the way of Allah a percentage of the income (that doesn`t count as charity, but you will be rewarded for purifying your money). The percentage that you need to pay in purification is contingent upon the percentage of haram in your portfolio.

Allah knows best.