We have written extensively about the pitfalls of 401k investing, the high fees in some plans, and other details to be aware of.
However, the fact is that 401k plans are one of the most powerful tools available for building wealth and long term financial security.
I recently read an article titled 5 Ways to maximize your rigged 401(k) Plan. The author made some good points about things to look for and ways to reduce costs while investing in your 401k. However, the last piece of advice was worrisome:
5. Minimize your reliance on your 401(k) plan. If you have a bad plan and your employer does not make any matching contribution, consider not participating. If your employer does offer a match, consider contributing the minimum amount necessary to obtain the maximum employer contribution. Supplement your retirement savings by opening an individual retirement account (either a traditional IRA or a Roth IRA, if you qualify) and invest some of the money that you normally would have tucked away inside your 401(k). With your own IRA, you control your investment choices.
The conclusion that you should not participate in your 401k because it is less than ideal and charges fees is irrational.
The author does not mention how much you can contribute to a 401k vs. an IRA ($17,500 vs. $5,500) or the benefits of tax deferral or automating your savings.
A 401k is actually one of your best options for retirement savings if you are in a high tax bracket. Also, the ability to deduct from your payroll before you see the funds is a great way to guarantee savings for many.
Yes, there will be people who will earn money helping you build and manage your investments and this also applies to your 401k plan. However, consider this, doctors earn money helping you improve and maintain your health. Plumbers, electricians and contractors earn money helping you improve and maintain your home.
Would you forgo a trip to the Doctor or a home repair because their compensation systems are imperfect?
It is true that all plans are not created equal and some charge fees that are too high and offer high cost mutual funds. If this is the case with your employer, your first move should be contacting your HR department to request lower cost fund offerings.
The bottom line is that while you should stay informed about your investments and make an effort to keep costs low, you shouldn’t let flaws in the system discourage you from saving and building a secure financial future.
If you have questions about your 401k plan, please contact us and one of our financial planners can help you determine the best strategy for your personal situation.
