My employer started offering a 401(k) plan a couple years ago with no employer contribution (we are a small company). I signed up as it seemed like a good way to force myself to save for retirement. Over the years I have become extremely unhappy with the company we use, mostly because they frequently "lose" contributions. I'm not talking about a short lag time, but months where I see no new contributions listed despite money coming out of my paycheck every other week. They always eventually fix it (although how would I know if they're really making it right), but it has happened at least three times, and gone on for months every time. I've never really felt comfortable that I could log in and see a true accounting.

Not realizing there are rules against rolling over a 401(k) while still employed, I made plans to open an IRA, thinking I could roll my money over and close down the 401(k). I've since read about in-service rollovers and know that I am not eligible. At this point, it seems like I have two options:

  1. Remain in this 401(k) with a company I wouldn't trust to balance my checkbook until I switch jobs (not currently on the horizon).
  2. Stop contributing to the 401(k), open an IRA, and contribute to that instead.

Given the lack of an employer contribution, are there any downsides to (2) besides the minor annoyance of having two accounts? The 401(k) is modest (less than $10,000). Are there, for instance, significant interest losses in having my money split between two accounts in this way?

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    Have you talked to the employer about these issues? Many times this is a sign of embezzlement when money "disappears" and "reappears" months later. – littleadv Jun 22 '16 at 19:02
  • I have, and he claims it is on the 401(k) company. I may never know for sure, but either way I would like out! The one thing that leads me to believe him is that the money does get "backdated" when it shows up, so it's not like he's suddenly making a $500 contribution months later (if that makes sense). – Christina Jun 22 '16 at 19:04
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  • Are you sure the investment returns get "backdated"/retroactively applied? Agree with littleadv, this is far more likely to be on the employer's side than the 401(k) administrator's side. Not that it's impossible to be the latter, but administrators are under much higher regulation and scrutiny. – stannius Jun 29 '16 at 19:42
  • That is interesting to know. I know that the contributions are backdated, but I have no idea if the returns are truly being applied - that's what I mean about not knowing for sure. If it was my employer, though, why would the 401k company backdate the contributions? Wouldn't that be fraud on their end, for no gain? I would love to Nancy Drew this thing, but it all went down initially while I was pregnant and then a new mom, so it kind of got reluctantly back-burnered. – Christina Jul 1 '16 at 18:59

If it was me, I would drop out.

You can achieve a better kind of plan when there is no match. For example Fidelity has no fee accounts for IRAs and Roths with thousands of investment choices. You can also setup automatic drafts, so it simulates what happens with your 401K. Not an employee of Fidelity, just a happy customer.

Some companies pass the 401K fees onto their employees, and all have limited investment choices.

The only caveat is income. There are limits to the deductibility of IRAs and Roth contributions if you make "too much" money. For Roth's the income is quite high so most people can still make those contributions. About 90% of households earn less than $184K, when Roths start phasing out.

Now about this 401K company, it looks like the labor department has jurisdiction over these kinds of plans and I would research on how to make a complaint. It would help if you and other employees have proof of the shenanigans. You might also consult a labor attourney, this might make a great class.

  • I'm not sure this is entirely correct. The limit to the "deductibility" is much lower - 184k is when you stop being able to contribute anything, deductible or not. But even if you can contribute, there's still a limit, and it's a pretty low one, 5.5k, as opposed to a maximum 18k you can contribute to a 401k. I would love to put the full amount I'm contributing to my 401k, to an IRA instead. – neminem Jun 22 '16 at 20:07
  • I checked a couple of sources, here is one: rothira.com/2016-roth-ira-limits-announced. MFJ phase out starts at 184K. – Pete B. Jun 22 '16 at 20:14
  • I believe you are correct about the limits before phase out, but your link is specific to Roth if I am reading it correctly. Here is a better one: irs.gov/retirement-plans/plan-participant-employee/… – Phil Sandler Jun 22 '16 at 21:20
  • Note that the Roth IRA contribution income limit is not really an issue, because, as long as you don't have existing money in pre-tax IRAs, you can just do a "backdoor Roth IRA contribution" (contribute to Traditional IRA, then convert to Roth IRA) regardless of income. For Traditional IRAs, there is no income limit for contributions; and there is also no income limit for deductions when neither he nor his employer is contributing to his 401k. – user102008 Jun 23 '16 at 18:03
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    Happily, making "too much" money is not one of my problems. – Christina Jun 24 '16 at 20:06

One possible downside is contribution limit. The 401K contribution limit is $18,000 for 2016, which is more than three times the limit for IRA contributions ($5,500).

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