How Good Is Your 401k?

Are there good investment options in your 401(k)? No? Finding a better place for your savings may be recommended. Don’t accept a retirement plan that doesn’t fulfill your requirements.

The money you save in your 401(k) plan year after year shouldn’t just sit in cash. You’ll need your savings to stay up with inflation, so you don’t lose purchasing power as you get older. Due to this, your retirement funds must be invested carefully.

Ideally, your 401(k) plan will provide various investment options to let you put your money to work in a way consistent with your risk tolerance, strategy, and goals. You might want to consider locating a better place for your savings if that’s not the case. In making your decision, you should consider the following factors:

Do you have a sufficient number of investment options?

Most 401(k) plans have a good mix of actively managed mutual funds, index funds, and target date funds. However, if you are dissatisfied with the number of fund options in your 401(k), it may be worthwhile to invest your long-term assets elsewhere.

According to Vanguard, the typical 401(k) plan provided 27.5 investment alternatives last year, and this amount remained virtually constant from the 2020 average of 27.4 funds. 55% of Americans have a 401(k) plan. However, it may not be the right retirement plan for you. Some 401(k)s have significantly fewer investment options. It’s possible that if that’s the case for you, and you’re not satisfied with your specific options, you might consider investing in something other than a 401(k).

Remember that if your plan provides few investment options, it might mean:

  • Paying exorbitant fees for your investments reduces your returns
  • Being obliged to invest too cautiously (and ending up with less money down the line)
  • Being compelled to invest in a way that you do not desire

And, given that your retirement assets are at stake, you deserve better.

Other alternatives for retirement investing

If you have earned income, you can create an IRA account, either regular or Roth, and invest it there. This method has the advantage that, unlike 401(k)s, IRAs enable you to invest in individual equities, so you’re not confined to a few dozen funds. Furthermore, having more options may result in reduced overall investing expenses.

Another alternative is to avoid the tax advantages of IRAs and 401(k)s and instead invest for retirement in a standard brokerage account. The advantage is that you will have a lot of financial flexibility.

Withdrawals from an IRA or 401(k) are generally subject to penalties if made before the age of 59 1/2. (though there are a few exceptions). 

With a standard brokerage account, you may withdraw funds without penalty. If you believe you will retire early, one of these accounts may be an excellent alternative.

Don’t undervalue yourself.

You should contribute enough if you want to receive the full employer match for your 401(k). Aside from that, you shouldn’t feel forced to save and invest in a 401(k) if you’re dissatisfied with your investing alternatives, especially if other options might get you closer to your goals.