Should You Ever Ditch Your Company’s 401 (K) Plan?
You’ve noticed that your new job – one with an amazing salary, a dream title, a beer fridge, and a ping-pong table in the break room – doesn’t have a good retirement plan. No matches. Investment options are scarce. The fees are sky-high. This quickly becomes what you lack in your old job. Not a recreation room — there was air hockey — but a pension plan in general.
Is there a better way? Should you try to accumulate retirement savings on your own, or collect them and sign up?
Focus on your own contribution first
Before you think about your employer’s approach, consider how you can contribute to your retirement savings on your own. If you base your own input on what constitutes a match, it can put you at a cost-saving disadvantage.
If retirement savings guides say you should save 15-20% of your income annually and you only save 3% because your company will have 6%, you have some personal work to do .
By the way, what corresponds to the rate? According to Fidelity, the 2019 average is 4.7% . If you’re used to roughly 4% or 5%, getting a job at a company that matches only 1% – or worse, zero – may have a little effect. But at the end of the day, any match is free money and you should take advantage of it.
Even if there are no matches on the table, it doesn’t necessarily mean that you should abandon your company’s plan. “Any mechanism that helps you save and invest for retirement while reducing taxable income is generally good,” said Anjali Pradhan , financial and investment consultant for women. Bottom line: You need to save for retirement anyway – and while doing so, probably save more than the minimum match amount.
How to evaluate your company’s retirement plan
Just because your employer offers a retirement plan doesn’t mean you don’t need to rate it like any other financial solution. “Most 401 (k) plans are outsourced to a financial institution that offers the participant limited freedom to choose their investments,” Pradhan said. If you are not offered a match, you can open a traditional IRA with an online brokerage account, which can provide you with more investment opportunities with potentially lower fees. On average, 401 (k) offers 29 different investment options, so if you see far fewer options in your company’s plan, it could be a sign of looking elsewhere. This post has a breakdown of some of the funds to look for in your employer’s plan, but you can also pick them if you’re investing on your own.
When comparing 401 (k) and IRA options, look at the cost ratio for the funds available. Anything less than 1% of your assets is considered eligible, although cost ratios are increasingly declining in the 0.15–0.25% range. Also keep an eye on administration fees – there is usually nothing you can do about it if you have already signed up for a particular program. Also, the choice between the two can depend on the mutual funds available and your personal preference.
Consider a mix and match strategy
One of the reasons you can still sign up for the less-stellar 401 (k) program: a higher donation limit. “Traditional 401 (k) still provides a good tax advantage, so it’s a good way to save money in the long run,” explained Zuzana Brochu , CFP and Senior Vice President of People’s United Advisors. “And you can deposit up to $ 19,000 a year or $ 25,000 if you’re over 50,” she said. The IRA cap is only $ 6,000 per year.
Before going alone, check if your employer offers Roth 401 (k). Broshu explained that the typical Roth IRA income limits do not apply to these accounts and you can also deposit up to $ 19,000 per year.
She also says that a mix and match strategy may work for some people. If you do not have access to a Roth 401 (k) and know you cannot make the most of both the 401 (k) and the Roth IRA, “consider contributing a certain amount to an employer-sponsored 401 (k) to gain – match advantage and a tax haven, as well as some amount for the IRA Roth to take advantage of tax-free growth, ”she said. This way, you won’t get stuck when you hit the IRA contribution limit. For example, if your employer pays up to 3% of your paycheck, you can choose one if the 3% matches, but also contribute a portion of your income to the IRA that you support.
After you’ve exhausted your tax credits, consider setting up a taxable investment account for additional contributions, Brochu said. “You will pay taxes as your capital increases, but in the long run, you will still be much better off than if you had not made these additional contributions to retirement.”
Whatever you choose, automate it
If you don’t have access to an employer-sponsored retirement plan, or prefer to do it yourself, make it easier to make regular contributions, Pradhan advised. “To mimic the simplicity of 401 (k), automate transfers to your IRA account so you don’t have to think about it,” she said. “It becomes a fixed expense, just like paying off your mortgage or car loan.”