Employer plans have their benefits but aren't perfect.
Signing up for a 401(k) plan through work is perhaps one of the easiest ways to save for retirement. With a 401(k), your savings get funded automatically via payroll deductions. You don't have to think about cutting back on spending month after month to free up cash for your retirement savings because that money comes out of your paycheck off the bat.
But despite the ease and convenience of a 401(k) plan, saving in the particular one your employer offers isn't necessarily your best bet. Here are a few reasons you may want to pass on your company's 401(k).
Image source: Getty Images.
1. There's no employer match
One big benefit of saving in a 401(k) is that you'll often get free money in your account in the form of an employer match. But companies aren't required to offer a matching incentive, and if yours doesn't, you may decide you'd rather save your money elsewhere.
2. The fees are high
Participating in a 401(k) could mean facing lots of fees. First, you may be looking at hefty investment fees, depending on the funds you choose -- though to be fair, it's common for 401(k)s to offer low-fee index funds as an option, as well as more fee-heavy actively managed mutual funds.
Second, the administrative fees associated with your 401(k) may be high. While you can control your investment fees by choosing low-fee assets, you don't get a say in what your plan's administrative fees look like.
3. You're not happy with your investment choices
A 401(k) generally will not allow you to put your money into individual stocks. For some people, that's not a problem. If you don't consider yourself an informed investor and aren't comfortable hand-picking stocks, you might prefer to put your money into the various funds offered by your 401(k).
But if you're someone who knows a lot about investing and has experience picking stocks, not being able to do that may be frustrating. When you invest in an index or mutual fund, you don't get total control over your investments. In the case of the latter, for example, you can choose a mutual fund based on its performance and strategy, but you won't be the one deciding which stocks are and aren't part of that plan's portfolio.
It could pay to look outside of a 401(k)
As convenient as it may be to save for your retirement in your employer's 401(k), you may be better off with an IRA if the above things apply to you. The upside of an IRA is that you have more control over your savings and investments. You can choose individual stocks to put your money into and don't have to submit a formal request through your payroll department each time you want to add more money to your account.
In addition to an IRA, you may want to consider housing some of your retirement savings in a regular, taxable brokerage account. The reason? IRAs have much lower contribution limits than 401(k)s, so if you have more money to invest above and beyond IRA contribution limits, a regular brokerage account could be a good bet. That way, some of your long-term savings will be unrestricted, which could come in handy should you decide that you'd like to kick off retirement on the early side.
Finally, if you're eligible, look to a health savings account (HSA) for long-term savings. Although these accounts are technically for healthcare expenses, you can carry HSA funds into retirement and cover your medical costs when they're more likely to be high. And once you turn 65, you can tap an HSA without penalty for any purpose, making these accounts a nice backup to an IRA, as well.
FAQs
According to Buffett, you should invest 90% of your retirement funds in stock-based index funds. According to Buffett, the remaining 10% should be invested in short-term government bonds.
What is one reason that some employees choose not to participate in 401 K plan? ›
Feeling behind and not fully understanding how to enroll and save can prevent nonparticipants from taking action. The consequences of this uncertainty are daunting; just 27% of all surveyed are confident they'll be financially prepared to live comfortably in retirement. actually thought they were saving for retirement.
What are three disadvantages of 401k accounts? ›
There are, however, some challenges with a 401(k) plan.
- Most plans have limited flexibility as it relates to quality and quantity of investment options.
- Fees can be high especially in smaller company plans.
- There can be early withdrawal penalties equal to 10% of the amount withdrawn before age 59 1/2.
With a 401(k), you will have to pay income tax on your contributions and the investment gains when you withdraw funds from the account. “Without knowing for certain how your 401(k) will perform or what the taxes will be in the future, your 401(k) can be a ticking tax time bomb,” Rubio said.
What does Robert Kiyosaki say about 401k? ›
Financial expert Robert Kiyosaki, famed author of “Rich Dad Poor Dad” holds an opinion that may seem unpopular. The opinion in question: The 401(k) is a “horrible” retirement plan. Why does the most popular retirement plan in America seem to be such a bad idea, according to Kiyosaki?
How much does Dave Ramsey say to invest in 401k? ›
When it comes to saving for retirement, money expert Dave Ramsey knows exactly how much you should be setting aside. Ramsey's recommendation, which he shared on his website Ramsey Solutions, is to invest 15% of your gross income into your 401(k) and IRA every month.
Can an employer force you to participate in a 401k? ›
Automatic enrollment 401(k)
The automatic employee contributions cannot exceed 10 percent of compensation in any year. The employee is permitted to change the amount of his or her employee contributions or choose not to contribute but must do so by making an affirmative election.
Is it worth contributing to a 401k if company doesn t match? ›
We generally recommend contributing to a 401(k) even if your employer doesn't match, but you might want to pass over the 401(k) if: You can't afford to make any contributions to a retirement account (in which case you should take a hard look at your budget and start planning how you can start saving).
Why do people opt out of 401k? ›
Reason to Forego 401(k) Contributions #1: You Have No Financial Safety Net. Putting money into a 401(k) doesn't make sense if you turn around and pull it right back out again. According to a recent TIAA-CREF survey, nearly a third of Americans have borrowed from their retirement account at some point.
Why is my 401k not worth it? ›
There are more than a few reasons that 401(k)s are a bad idea, including that you give up control of your money, have extremely limited investment options, can't access your funds until you're 59.5 or older, are not paid income distributions on your investments, and don't benefit from them during the most expensive ...
Key Takeaways
Good alternatives include traditional and Roth IRAs and health savings accounts (HSAs). A non-retirement investment account can offer higher earnings but your risk may be higher. Investment accounts don't typically come with the same tax advantages as retirement accounts.
What are 2 arguments for not investing in your company's 401k? ›
3 Reasons to Say No to Your Employer's 401(k)
- There's no employer match. One big benefit of saving in a 401(k) is that you'll often get free money in your account in the form of an employer match. ...
- The fees are high. ...
- You're not happy with your investment choices. ...
- It could pay to look outside of a 401(k)
A general rule of thumb says it's safe to stop saving and start spending once you are debt-free, and your retirement income from Social Security, pension, retirement accounts, etc. can cover your expenses and inflation. Of course, this approach only works if you don't go overboard with your spending.
What is not an advantage of a 401k? ›
401(k) Disadvantages
There are a few disadvantages, too. Withdrawals from your traditional 401(k) are taxed at your prevailing income-tax rate when you take money out. There are restrictions on how and when you can withdraw money from the account, as well.
What argument against borrowing from your 401(k) was most convincing to you? ›
Common arguments against taking a loan include a negative impact on investment performance, tax inefficiency, and that leaving a job with an unpaid loan will have undesirable consequences. If you don't want to tap into your retirement savings for money, you can always look into borrowing a personal loan.
Should I take my 401k out of the stock market? ›
In other words, if you have a solid financial plan, and your 401(k) is well-optimized, sometimes the best thing to do in a market downturn is to stay the course, especially if you are a younger investor with years until retirement.
What does Warren Buffett not invest in? ›
Gold. Buffett is also uninterested in gold. In his 2011 letter to shareholders, he noted that gold has two significant shortcomings, “being neither of much use nor procreative.” “If you own one ounce of gold for an eternity, you will still own one ounce at its end.
Do millionaires use 401k? ›
The number of "401(k) millionaires" — 401(k) plan participants with balances of at least $1 million — has reached a record high, new data from Fidelity Investments shows.
Is 401k protected from market crash? ›
Can You Stop Your 401(k) From Losing Money? In a down market, you could transfer all of your holdings to cash or money market funds, which are safe but provide little to no return. (They may not even keep up with inflation.) This, however, is not typically advised unless you are nearing retirement.
