We are taught that the 401 K plan is the absolutely best place to save your retirement dollars. In fact in pop culture finance terms, it is an absolute truth. What if the experts are wrong? What if the answer is "it depends"? What if we would invest in other types of accounts if we knew what to use?
Well, I am hear to tell you that the 401 K plan is not the absolute answer. All 401 K plans are not equal. There are some that are good, some that are lousy, and some that are just ok. My point is that it is important to be careful in picking out the account or accounts that you are going to use as your primary vehicle for your retirement dollars. Here are some things to consider:
If the 401 K plan has an employer match, DON'T waste it
I don't care how bad your 401 K plan is. If your employer is giving away free money, it makes sense to participate to the level of that gift. Investing above the match would be based on the quality of the 401 K plan. You don't want to throw away free money.
The point of investing is to develop the habit of saving
The point is not whether or not you use a 401 K plan. The main point is that you develop the habit of saving. This is key!! IF you can't start saving a good percentage of your money, retirement some day is not even a discussion. Everything starts with this key habit.
Make sure your 401 K plan can Satisfy your Risk Level
This one I could write hundreds of pages on. I will sum it up this way. Most 401 K plans are geared for people with risk levels that are at least equal to the stock market. So, if the market tanks, you are going to tank along with it. For those who are more conservative, they are stuck with the target date or lifestyle funds that invest based on age. (There are definite pros and cons that go along with these types of funds). Most 401 K plan providers select fund options based on performance (which is higher risk). What about the investor who wants lower risk stock strategies? For the most part, they are non-existent.
What are other alternatives to the 401 K Plan?
You can always set up a strategy to fund both IRA's and or Roth IRA's outside of the company plan. Once you have maxed those out, you can set up a taxable investment account at an investment company such as a Fidelity, Vanguard or Charles Schwab. The downside is that they are not tax protected like 401 K plans. However, you can save an unlimited amount into these accounts and your choices are unlimited which is good for the conservative investor.
The month of April is financial literacy month. For my part, I am setting up appointments at no-cost to put together a basic retirement plan. During that process, we evaluate where you are putting your money. We call this the Know Your Numbers Project. To sign up for a slot, email email@example.com.