Historically, when asked if an employee should participate in a company sponsored 401(k) plan, the answer was almost always automatically, “Yes”. There are a couple of reasons for this. First, the majority of workplace retirement plans had some type of employer match or profit sharing contribution that allowed the employee to save more money than they could with their own contributions. Second, before modern technology and scale brought high 401(k) fees down, expenses to contribute to an outside 401(k) plan were much higher. Plus, for most employees in the workforce, navigating the vast array of mutual funds, ETFs, and other 401(k) investment options available outside of the workplace could be very overwhelming.
These days, deciding whether or not to participate in your employer-sponsored 401(k) plan may be a more complex decision. Many workplace retirement plans do not offer employer match, and with the proliferation of more cost-efficient 401(k) providers, the answer becomes more complex and may require research on the part of the employee.
If your employer-sponsored 401(k) plan does offer any type of employer match for retirement plans, the answer still basically remains, “Yes, participate”. If there is no employer match, the employee must consider two items:
- How much will I contribute?
If an employee is going to contribute less than $6,000 ($7,000 if you’re older than 50), and there is no employer money going into the plan, they may want to consider an Individual Retirement Account (IRA). Unlike a 401(k), an individual with an IRA has complete control over the fund expenses and investment lineup.
However, for those with very aggressive retirement goals, a 401(k) allows for $19,000 in salary deferred 401(k) contributions per year ($25,000 for those over 50). High-contributing individuals should probably opt for the employer-sponsored 401(k), provided that the costs are reasonable and there are quality investment options available.
- What are the costs?
To understand the costs of your employer-sponsored 401(k) plan, request a 404(a)(5) participant fee disclosure from your employer. This document contains a summary of the costs of the company 401(k). Look for a cost range under 1% of the assets in the plan, ideally half of that. Believe it or not, there are still plans that cost more than 2% or 3% of the assets in the plan. Again, consider all factors of your plan, including employer match, high expenses, and the quality of funds available before making a decision on how you want to save for retirement.
Located in Denver, Colorado, Plan Strategies, Inc. is an SEC-registered 401(k) investment advisor to small and mid-sized businesses. PSI is focused on decreasing the 401(k) fiduciary risk facing employers offering retirement plans.