Unless your employer offers a 100-200% match to your 401(k) plan contributions, I highly recommend that you put your retirement money anywhere else but a 401(k), 403(b), or similar plans.
This is not standard financial planning advice, what are some of the problems?
1. Your money is locked in prison. Your 401(k) plan administrator normally offers 10-20 poorly performing mutual funds with very high fees. You can confirm this with websites like BriteScope.com or other companies that analyze retirement plans showing the +$150,000 you are losing to these plans over your career. Every plan portfolio I have reviewed is also highly correlated, meaning they all move up and down together, there is no opportunity to hedge or truly diversify your portfolio. Yes, a few 401(k) plan programs allow you to invest in anything (called a “brokerage option”), but they make it difficult to do this, charge you an extra annual fee, and the trend is moving away from permitting this type of investing.
2. Your 401(k) plan administrator is the metaphorical prison warden. Normally, it is someone in Human Resources with zero financial background. Unfortunately, they are frequently in meetings with attorneys to minimize their risk exposure to lawsuits from you – what is not on the agenda in these meetings is providing you the best financial options for a prosperous retirement. In the past, I have tried to assist many people trying to remove a minor shackle of their 401(k) plan. I have been about as successful as a convict complaining to the prison warden about something trivial.
3. What are your options when money is trapped in a 401(k) with poor performing funds? Try to time the ups and downs with newsletters or technical analysis. Not so fast Skippy – this activity is a slight extra expense for the mutual fund managers so they have several defenses to prevent this. First, they forbid frequent trading, impose extra fees for moderate traders, and impose trading bans for large groups of people making the same trade from a newsletter or advisory service.
4. I have gone through detailed retirement forecasting for many people and I have never found a 401(k) plan that is a successful location to put your retirement money. Even with a 50% employer match up to 6% of your contribution. This is because the extra fees and poor performance subsume the tax-deferral benefit. A Roth IRA or other retirement vehicles are far better at providing investments for a prosperous retirement.
5. Lastly, 401(k) plans are a political invention that is subject to the whims of both state and federal politicians. It seems that every year there is some politician trying to pass new 401(k) legislation at the expense of employees who invest in them. A few recent attempts include: forcing plans to buy U.S. government debt, making contributions mandatory for all employees, putting further caps on loans, adding more restrictions, and frequently, of course, adding more taxes on them.
Even if you are currently contributing the maximum to your 401(k) plan, you can stop contributing and divert your money toward far more friendlier locations for investors.