Buzz
You’ve discovered that your new job, with its impressive salary, dream title, and fun break room featuring a beer fridge and ping-pong table, doesn’t offer the best retirement plan. There’s no match, the investment options are limited, and the fees are ridiculously high. Soon, you find yourself missing the retirement plan from your old job—not the break room (that one had air hockey), but the retirement plan, of all things.
Is there a more effective alternative? Should you handle your retirement savings on your own, or should you just bite the bullet and enroll?
Start by prioritizing your own contributions first.
Before considering your employer’s match, think about how much you can personally contribute to your retirement savings. Relying solely on the match to determine your own contribution may leave you at a savings disadvantage.
If retirement savings guidelines suggest putting away 15-20% of your income annually, but you’re only saving 3% because the company’s match brings it up to 6%, you’ve got some work to do personally.
By the way, that match rate? The average in 2019 is 4.7%, according to Fidelity. If you’re accustomed to a 4% or 5% match, joining a company with just a 1% match—or none at all—might sting a little. But remember, any match is essentially free money, so make sure to take advantage of it.
Even if there’s no match available, that doesn’t automatically mean you should skip your company’s plan. “Any system that helps you save and invest for retirement while reducing your taxable income is usually beneficial,” said Anjali Pradhan, a CFA and investment coach for women. Bottom line: one way or another, you need to be saving for retirement—and probably saving more than the minimum match amount, too.
How to assess your company’s retirement plan
Just because your employer provides a retirement plan doesn’t mean you shouldn’t assess it like any other financial choice. “Most 401(k) plans are outsourced to financial institutions, offering limited investment freedom for participants,” said Pradhan. If no match is offered, you might consider opening a traditional IRA with an online broker, which gives you more investment choices and potentially lower fees. The average 401(k) offers 29 investment options, so if your company’s plan provides fewer, it could be worth exploring other options. This post breaks down some funds to look for in your employer’s plan, but they are also available if you choose to invest on your own.
When comparing 401(k) and IRA choices, focus on the expense ratios of the available funds. Anything below 1% of your assets is generally fine, though expense ratios in the 0.15-0.25% range are becoming more common. Be sure to check for administrative fees—there’s not much you can do about these once you’re enrolled in a specific plan. Ultimately, your choice may depend on the mutual funds available and your personal preference.
Consider a mixed strategy
One reason you may still want to enroll in a subpar 401(k) plan is the higher contribution limit. “A traditional 401(k) still offers great tax benefits, making it a solid option for long-term savings,” said Zuzana Brochu, CFP and Senior Vice President at People’s United Advisors. “You can contribute up to $19,000 a year, or $25,000 if you’re over 50,” she added. IRAs, on the other hand, are limited to $6,000 per year.
Before going solo, see if your employer offers a Roth 401(k). Brochu noted that the typical income limits for Roth IRAs don’t apply to Roth 401(k)s, and you can also contribute up to $19,000 annually.
She also suggests that a mix-and-match strategy could be effective for some individuals. If you lack access to a Roth 401(k) and know you can’t fully fund both a 401(k) and a Roth IRA, “Consider putting a portion of your contribution into the employer-sponsored 401(k) to take advantage of the match and tax shelter, while allocating another portion to a Roth IRA to benefit from tax-free growth,” she explained. This approach ensures you aren’t limited when you hit the IRA contribution cap. For instance, if your employer matches up to 3% of your salary, you could take advantage of the 3% match and still contribute some of your income to your Roth IRA,” she added.
After you’ve maximized your tax-advantaged options, think about opening a taxable investment account for further contributions, Brochu recommended. “You’ll pay taxes on any capital gains along the way, but ultimately, you’ll be in a better financial position over time compared to not making those extra contributions to your retirement,” she said.
Whatever you decide, make it automatic
If you don’t have access to an employer-sponsored plan or prefer to manage it yourself, make regular contributions easy, Pradhan advised. “To replicate the convenience of a 401(k), automate transfers to your IRA account so you don’t need to think about it,” she suggested. “It becomes a fixed expense, like paying your mortgage or car loan.”
