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When It Makes Sense to Opt Out of Your 401(k)

Posted By Miranda Marquit On 11/16/2011 @ 12:25 pm In Retirement | 10 Comments

It’s considered a no-brainer by many: Participate in your employer’s 401(k) plan. In fact, due to recent legislation, many employers automatically enroll their workers in 401(k) plans. This enrollment, though, doesn’t guarantee that workers won’t opt out. And, in some cases, it make actually make sense to opt out.

Just because your company has a 401(k) [3] doesn’t mean that it’s the right choice for you. Before you just blindly participate in your company’s 401(k), make sure that it makes sense. You don’t want to end up with a retirement account that doesn’t help you maximize your money. Here are some indications that your company 401(k) may not be the best choice for you:

  • No company match: Many companies will match your contributions to a certain point. However, if your company doesn’t provide a match, it better have some other great features that make up for it.
  • High plan fees: Some company 401(k)s feature high plan fees. You might pay high administrative costs, or there might be a buy-in. The funds chosen by some companies might come with high management fees and even sales loads, that eat away at your returns.
  • Limited investment choices: In some cases, you might not have many investment choices when it comes to your company 401(k). Without the option to choose something that works for you, you might end up in a plan that doesn’t adequately help you reach your goals. Another problem might be that your plan is too heavily invested in company stock. Do you really want your future to be tied too closely to the fate of your company’s stock?

In some cases, you might be better off opting out of your company’s 401(k) and instead investing on your own [4]. You could open an IRA, and have access to lower cost options — and a variety of investment choices. This is especially true if you don’t have the ability to max out your 401(k). One of the advantages to a 401(k) is that your contribution limits are higher. If you won’t contribute more than the IRA limit, though, that advantage disappears.

Of course, it doesn’t have to be either-or. You can also combine your efforts. If your employer offers a match, but you don’t like your investment options, you can do what is necessary to earn the maximum match, and then open an IRA to handle the rest of your retirement contributions. It’s perfectly alright to spread your contributions around between accounts — especially if your employer’s 401(k) is lacking.

In some cases, the costs associated with an employer’s plan can be so high that you are better off investing elsewhere, even if you aren’t using a tax-advantaged plan. Run the numbers and consider the costs (including the costs that can arise from having an incompetent plan manager at the helm of your retirement account). It goes against most financial conventional wisdom, but sometimes it actually makes sense to opt out of your company’s 401(k). Just make sure you have an alternative plan for funding your retirement if you decide that opting out is your best choice.

(Photo: mujitra [5])

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[3] 401(k): http://www.bargaineering.com/articles/401k-ira-fund.html

[4] investing on your own: http://www.bargaineering.com/articles/create-investing-plan.html

[5] mujitra: http://www.flickr.com/photos/mujitra/2912268478/

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