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One Clear Sign You Have a Rotten 401(k)—And What to Do About It

If your 401(k) is a big deal in your retirement savings strategy, you’re not alone. According to the Investment Company Institute (ICI), more than 52 million workers participate in a 401(k) plan. That adds up to $4.7 trillion in retirement assets, making 401(k)s one of the most common sources of retirement income for U.S. workers.

But plans vary from employer to employer, so not every 401(k) plan is what it’s cracked up to be. The last thing you need is to throw your retirement investing budget away in a plan that’s going nowhere. Take a look at some reasons why you might consider stopping your contributions to your employer’s 401(k), then check out our suggestions for how to keep your retirement plan on track without one.

Don't throw your retirement investing budget away in a plan that's going nowhere.

No Match? No Deal

All 401(k) plans come loaded with certain benefits. First, there’s the tax deferral that helps your retirement money grow faster. Then there are the automatic contributions that make regular retirement investing a breeze. On top of that, traditional 401(k) contributions lower your taxable income, allowing you to invest more without feeling the pinch in your paycheck.

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But the crowning glory of any 401(k) plan is the employer match. It can take many forms, but the most common is a 50% match on the first 6% of your salary, according to a recent Vanguard report. It’s an instant and guaranteed return on your money.

Awesome, right? But without an employer match, the other benefits lose their punch. In fact, if your employer doesn’t offer a match, you’re better off to skip it (as a first step) and start by investing in a Roth IRA instead. Here’s why:

  • Even though tax deferral is great, the money you invest in your Roth IRA will grow tax-freeYou won’t have to pay taxes on the money you withdraw from your Roth IRA when you retire, but you will have to pay taxes on money withdrawn from your 401(k).
  • Your 401(k) offers limited investment choices. But with a Roth IRA, you can choose the best mutual funds from the thousands available.

Roth IRAs have contribution limits—currently $5,500 per person or $6,500 if you’re 50 or older. If that’s not enough to get you to your goal of investing 15% of your income for retirement, invest the remainder in your 401(k). A tax-deferred account is better than a fully taxable one, after all.

Terrible Investing Options = Terrible 401(k)?

A recent study of 401(k)s shows the average plan offers 25 investment options. Mutual funds are the investment of choice for most 401(k) participants, but the quality of those funds isn’t always the best. Some could be poor performers, charge high fees or both. Or your limited choices could keep you from spreading your money around into different mutual fund types, which increases your investing risk.

The best way to know for sure if your 401(k) offers good mutual fund choices is to review your options with your own investing professional. Without the help of a pro, you’d have to dig up information on each option and compare their performance, fees and investing styles all on your own—a time-consuming and confusing process.

An investing pro can help you decide if your 401(k) is working for or against you.

With all that in mind, it’s rare that a 401(k) would be so expensive or offer such poor mutual fund options that you would give up your employer match by not participating in the plan. Your pro can be a big help by showing you how to make the most of your match even if your options aren’t so hot.

Make Sure Your Options Are Working for You

If you decide to skip your 401(k) altogether, it’s important to find additional tax-advantaged retirement savings plans to build your nest egg. For single people, a Roth IRA will be essential. After you max out your Roth, however, you will have to open a taxable investment account.

Married people have a couple more options:

  • You can both open Roth IRAs and max them out—that’s a potential $11,000 a year.
  • If you have a lousy 401(k) but your spouse’s plan is awesome, you can take advantage of their 401(k)’s tax deferral and meet your 15% goal by increasing contributions to their 401(k) account—up to $18,000 a year, plus an additional $6,000 if you’re age 50 or older.

Whether you can afford to max your retirement accounts out or you’re stretching to reach your 15% goal, you’re dedicating a lot of your income to retirement. It only makes sense to work with a professional who can help you decide the best way—not just the easiest way—to divvy up your retirement dollars.

How to Know if Your 401(k) Is a Stinker

As you evaluate your 401(k) to decide if you should continue participating, here are a few specifics to keep in mind:

  • We said before that a 401(k) with an employer match would hardly ever be too expensive to participate in. But if your 401(k) fees are higher than average, be sure to contribute no more than necessary to receive your full employer match. If you don’t know what your expenses are, or if they’re too high, your investing professional can help you figure it out and put together a Roth IRA that’s less expensive.
  • A skimpy employer match makes the question of expenses even more crucial to answer. If your match is 2% or less, fees will have an increasingly dramatic effect on your ability to build a nest egg. That makes a Roth IRA an even more important part of your retirement savings strategy.
  • You should have a selection of at least a handful of different types of growth stock mutual funds. If your 401(k) options are limited to mostly company stocks, ask your investing pro how to balance out your risks.

If you’re not sure if your mutual fund is better or worse than average, you owe it to yourself to talk with an investing professional.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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