Episode 106: 401k employer sponsored retirement plans (much like 403b plans) have both good and bad features. Like all things economic, you have to make choices based on trade-offs.
The following is simply my personal opinion…it may not be relevant to your situation or preferences.
What I like about 401k:
- Easy to set up a payroll contribution deduction through your employer. This encourages people to save by deducting the amount from their paycheck before they spend it.
- High contribution limits- under age 50: $18,000; over 50: $24,000 This is a good way to rapidly build up your retirement savings especially just prior to retirement or if you plan to get another job [assets can then be rolled over into an IRA/ROTH that offers more choices and lower fees].
- ROTH accounts are now allowable.
- Employer match [this is essentially a 100% return on your money]
What I dislike about 401k:
- Limited investment choices and designed inflexibility. These accounts are designed to encourage mutual fund buy & hold strategies. [My preference would be ETFs in an IRA/ROTH.] Most plans don’t even offer a money market as a cash equivalent.
- High fees. Although most fees are not readily visible, they’re there and are a major source for exorbitant profits to Wall Street. [My preference would be ETFs in an IRA/ROTH.]
- Targeted date funds. These are essentially mutual funds that allocate more of your assets into bonds as you get older. My problem with this is the illusion that bonds are SAFE- when interest rates rise, bond funds LOSE money.
- This is a positive to most people but not to me. The easier access is made to retirement savings the more people will spend it. Most employees also don’t realize that when they terminate employment, the loans must be repaid.
Bottom line- personally I would only contribute enough to receive the full employer match (this is a 100% return on your money) and then I would max out allowable contributes to a personal IRA/ROTH [which offers more choices and flexibility]. The exception to this would be if I were nearing retirement or knew that I’d be leaving the employer in a few years- then I would consider contributing up to the maximum limit, knowing in a few years I’d roll it over to an IRA/ROTH [that I would control].
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