Not everyone has access to a 401(k) plan through a job, so if your employer happens to offer one, you might consider yourself lucky. That said, not all 401(k)s are created equal, and while they do come with much higher annual contribution limits than IRAs, they’re not your only retirement savings option. Here are a few reasons to pass up your employer’s 401(k) — and find a different home for your money.
1. You don’t get an employer match
Many companies that sponsor 401(k)s also match employee contributions to varying degrees. But if your employer offers no match whatsoever, then it pays to consider housing your savings elsewhere
Keep in mind, however, that many companies have cut back on 401(k) matches temporarily during the coronavirus pandemic in an effort to slash costs and conserve funds. And if that’s the case, you may not want to ditch that plan so quickly.
Your best bet in this regard is to talk to someone in your benefits department and get a sense of when that company match may be reinstated. Remember, as coronavirus vaccines are rolled out to the public, the economy as a whole could improve, and that could trickle down to your employer. Therefore, if you once had a match, you may be in line to get it back sooner than you think.
2. Your plan comes with high administrative fees
It costs money to maintain a 401(k) plan, but unfortunately, that expense is generally passed on to you, the saver. If your plan’s administrative fees total more than 1%, it may be time to find a new place to stash your long-term savings. You don’t want needlessly high fees eating away at your returns.
3. You’re stuck with limited investment choices
Generally speaking, 401(k)s offer fewer investment choices than IRAs — because in a 401(k), you can’t put your money into individual stocks like you can in an IRA. Rather, you’ll be limited to different mutual funds — actively managed funds that are notorious for high fees, as well as index funds.
Some 401(k)s offer a decent investment mix, but if you’re not happy with the choices your plan has to offer, it could make sense to open an IRA — especially if you’re a well-informed investor with specific opinions about the stocks you do and don’t want.
Don’t settle
With a 401(k) plan, you can contribute up to $19,500 this year if you’re under 50 and up to $26,000 if you’re 50 or older. Not only can that result in major near-term tax savings, but it can also set you up for a very comfortable retirement.
IRAs, by contrast, max out this year at $6,000 for workers under 50 and $7,000 for those 50 and over, so those tax benefits are more limited. But if you’re not happy with your 401(k), it could still pay to move your savings to an IRA, despite those lower limits.
Remember, too, that there are ways to sock away money for the future outside of a retirement savings plan. You can contribute to a health savings account or open a traditional brokerage account, which won’t offer tax benefits but will give you more flexibility. The point, either way, is that you don’t have to settle for a lousy 401(k), so explore your options before you resign yourself to one.