Signing up for a 401(k) scheme 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) scheme, 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).
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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 execute 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 pick — 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 scheme’s administrative fees look admire.
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 encounter 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 pick 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 scheme’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 pick individual stocks to put your money into and don’t have to submit a formal inquire 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 execute that you’d admire 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.
