Five Options For a Lousy 401k Plan
Please enjoy this post from my good friend Roger from The Chicago Financial Planner as I recover from my trip to Vegas…
Many folks have made saving for retirement a priority for 2014 and beyond and this is a great New Year’s resolution. One of the best means of saving and investing for your retirement is your employer’s 401(k) plan, if one is offered. What if your company offers a lousy plan? Here are some alternatives to consider.
What Constitutes a Lousy 401(k) Plan?
Here four typical characteristics of lousy plans:
- An investment menu consisting of proprietary mutual funds
- Single fund family investment menus
- Expensive share classes
- A group annuity “wrapper” around the plan
Option 1: Use the Best Funds in the Plan
Even the worst plans usually offer a few decent investment options. Focus your contribution in these few investment choices and use investment dollars outside of the plan to complete your portfolio’s overall asset allocation.
Option 2: Company Match
Even with the worst of plans you will generally want to contribute at least enough to receive the full company match. If your plan offers to match half of all contributions up to 6 percent of your salary, that’s an extra 3 percent contribution from the company, which gives you an instant 50 percent “return” on your money. That’s hard to beat.
Option 3: Individual Retirement Accounts (IRAs)
Anyone can contribute $5,500 ($6,500 if you’re age 50 or over) to an IRA for 2013 and for 2014. The deductibility of a traditional IRA contribution will depend upon your income and whether you are covered by an employer’s retirement plan. Likewise, with a Roth IRA there are income ceilings that determine whether you can make a Roth contribution. A third alternative is a non-deductible Traditional IRA contribution. In this case while the contribution is made with after-tax dollars, your investments in the account grow tax-deferred. Note this version of the IRA requires more careful record keeping due to the tax rules upon withdrawal.
Option 4: Self-Employed Retirement Plans
Do you run a business on the side? If the business is generating income, consider starting a retirement plan. Among the options to consider are a SIMPLE, a SEP IRA, and a Solo 401(k). Remember that any overall contribution limits will apply to your company retirement plan and your self-employed retirement plan combined.
Option 5: Consider Your Spouse’s Plan
If you are married and your spouse’s employer offers a 401(k) or similar retirement plan, check out that plan to see if it offers better investment options with lower costs. Perhaps he/she works for a larger organization and has access to low cost institutional-style mutual funds.
In this case it would make sense to contribute the maximum you can afford to this plan to take advantage of these options. You would then want to contribute at least enough to your 401(k) in order to get the maximum match if one is offered. After that, depending upon your situation, you might consider an IRA as discussed above, or other options such as a self-employed retirement plan (if applicable to your situation).
Other Retirement Savings Options
Beyond a retirement plan you can always save and invest via taxable investment accounts at a brokerage, mutual fund company, etc. While you won’t get the tax deferrals available with most retirement plan options, this is still a solid way to accumulate money for retirement and other financial goals. You might also consider a variable annuity, but be very, very careful here to find one that has low costs and no surrender charges. This will exclude most, if not all annuity products sold by brokers and registered reps.
A 401(k) plan can be a great savings option for you. However you will want to be aware of other options in the event that your employer’s plan is sub-par or in the event that you have the ability to save amounts over and above what is allowed for the 401k.
How is your 401(k) plan at work? Is your employer doing what they need to be in order to make sure it’s not lousy?
Roger Wohlner, CFP® is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger’s popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans.