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Whether you're curious about the returns from your current employer's plan or you're weighing a job offer from another company, reviewing your 401(k) plan is always wise. After all, small differences in 401(k) plans can add up to real money. But even if your plan doesn't come out well, investing with it may be a better option than using another vehicle.
Your employer determines how many choices you have in your 401(k) plan. The average plan has only eight to 12 choices, while some have over 100. The reasons that many employers limit the choices is that they have to vet them and select them in line with their fiduciary duty. Plus, if your employer matches, they'll be investing along with you. More choices are generally better than fewer, but if your 401(k) plan offers a few good choices that suit your needs, anything else might not matter to you.
The returns from the investments in your company's 401(k) plan are probably reported as net returns. A 6 percent return might sound pretty good, but if it's hiding a 1 percent expense ratio for the fund and an additional 1.5 percent in portfolio management fees, you're missing out on earning a return of 8.5 percent. If you invest $10,000 at 6 percent for 20 years, and compound it, you'll have $32,071.35. That same $10,000 turns into $51,120.46 after 20 years at 8.5 percent.
Your employer's 401(k) plan can also offer additional features. For example, if your employer matches your contributions, it means that you end up with more money invested and growing for you. Some plans give you additional flexibility by letting you take hardship distributions or borrow from your 401(k). Having that flexibility might even make it more affordable for you to contribute more to the plan since you can contribute money knowing that, in an emergency, you can either pull it out or borrow against it.
It's Better than Nothing
If your company's 401(k) offering isn't competitive and you don't want to leave, consider contributing to it anyway. Consider asking your employer's benefit administrator if the plan can be changed or expanded. After all, if it's not a good plan for you, it probably isn't for your employer either. You may also choose to reallocate your 401(k) money from high-fee investments in the plan to lower-fee investments that the plan offers, then use a different account to replace those investments. For instance, if your 401(k) account has expensive stock funds but a good, low-cost bond fund, you could shift your 401(k) funds to bonds and invest in stocks in your individual retirement account (IRA) or taxable accounts. The benefits of your company's 401(k) plan probably outstrip its drawbacks, though. The amount of money saved by putting tax-deferred money into the account as opposed to investing money in a taxable account can go a long way to countering any high fees. While you can invest some money in an IRA, the contribution caps are much lower. In 2013 you can only put either $5,500 or $6,500 depending on if you're under or over 50 in your IRA, versus $17,500 or $23,000 in a 401(k). If you don't use your 401(k), anything over the IRA cap would have to go into a taxable account.
- FINRA: Smart 401(k) Investing—Investing in Your 401(k)
- Kiplinger: The High Cost of 401(k) Fees: How Much Are You Paying?
- United States Department of Labor: 401(k) Plans for Small Businesses
- AAII: The Investment Implications of Tax-Deferred vs. Taxable Accounts
- Vanguard: Contribution Limits for Retirement Accounts
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