401(k)s offer investors a way to save for retirement using investments that they may not otherwise have access to. If your company offers a 401(k) it can be a great benefit to have, especially if they offer a match! 401(k)s usually allow plan participants a way to invest at a reasonably low cost with several different investment options. They also have higher contribution limits and different income requirements than traditional IRAs. However, there can be drawbacks to investing in a 401(k).
1. Limited Investment Selection : The company you work for is responsible for offering investment options in the plan and they usually will use an advisor to help them. The plan sponsor (which is the company you work for) will contract with a record keeper to offer a platform to deliver investments through. Together they will give a slate of investment options for the plan participants to choose from. These selections are usually limited to a few dozen options.
2. Less Personalized Advice : There is a plan advisor that should visit and be on call for any questions you have. Sometimes this person is hard to pin down for personalized service and they may only be able to give general education to you about investing rather than build a particular strategy for your situation.
3. Lack of Control : The company you work for has the final say on how the retirement plan works which is a worthwhile tradeoff if they are footing the bill for the plan and matching contributions. However, if you ever separate service (are fired or quit or retire) then you still have to work with your old HR department when you’d like to make changes to your investments or make a withdrawal.
I think 401(k)s are a great option for many people and they provide a nice way to save money for retirement in a tax advantaged way. If you’d like help managing your current 401(k) let us know. We’d be happy to provide some consulting on your existing 401(k) and help you make good decisions.