Is my company 401k okay or should I be using an IRA?

Question

My company does not have a matching 401k. Instead it is a profit sharing 401k. How should I approach this? Should I consider investing primarily in an IRA instead? How much should I be contributing since there is no maxed matching contribution amount like a matching 401k? The max contribution, period, per year is $16,500.

Currently I'm putting 5% into the 401k, but was planning on increasing it to at least 10% at the next available time (I can only adjust contributions semi-annually). I just started on this 401k a few months ago (I'm 23 years old).

Answer 1

If there is no match and you are disciplined enough to contribute without it coming directly out of your paycheck, dump the 401K.

The reason: Most 401K plans have huge hidden fees built into the investment prices. You won't see them directly, but 3% is not uncommon. 3% is a horrible drag on your investment performance. Get an IRA or Roth IRA and pick something with low fees.

Bonus: You will have a lot more investment choices!

Answer 2

I think it comes down to whether you are happy with the investment choices in the 401k. If you are, there is no reason not to invest there. Additionally, it doesn't have to be an either-or choice. You can invest up to the maximum in both accounts.

BTW, congratulations on thinking about retirement at your age. I wish I had been in a position to do that.

Answer 3

If your employer does not offer contribution matching, and you don't like the range of investment options provided by the company 401k, then you probably are better off investing in your own IRA instead. In an IRA held at a bank or brokerage, you can invest in multiple stocks or funds and move money around within the IRA pretty freely in most cases.

If your company is doing well and is actually sharing profit into the 401k, you might consider leaving your 5% contribution to the 401k where it is and put the other 5% you are planning to contribute into a new IRA of your own. This straddles the risk of you losing money if your company 401k tanks (or profit sharing dries up) and your missing out on profit sharing if it continues to pay well.

Answer 4

My thoughts are your retirement investing priorities should be as follows:

1. 401k up to getting all the free money from your company's matching.
2. Roth IRA up to the maximum.
3. 401k or Traditional IRA up to maximum allowed under the law.
4. Savings outside of tax-advantaged accounts.

So in your case I would not put any money into your 401k until you have maxed out your Roth IRA.

Answer 5

If they're not matching, and their profit-sharing has nothing to do with how much you invest, then I'd say don't bother with the company 401k at all. If you need to at least have an account open to get the profit sharing, then contribute the bare minimum.

Having your retirement account through your company forces you to follow their standards, choose from their funds, use their broker, etc. It also means that when you leave the company, you either have to move your money anyway, or else have an account through a company you don't work for, which I wouldn't feel all that comfortable doing anyway.

If you open a retirement account through your bank or a private financial planner, then it's yours, and you can contribute what you want, when you want, and buy the securities that you want. Your account executive is there to service you, not your company.

Answer 6

Why not do both? The object is to "squirrel" away as much money as possible. The 401k has the advantage of being a payroll deduction. The IRA, if you can save the money, gives you more control. When you change jobs, you can "roll over" your first 401k into either your IRA or your second job's 401k.

Note: There are legal limits on total contributions to IRA and 401ks. I've forgotten what they are, so find out for yourself. There may also be income limits, but ones that don't apply to most 23-year olds, unless they own their own company or work for say, Goldman Sachs.