It may sound counterintuitive, but stashing funds in your workplace retirement plan could actually make it more challenging for you to retire. Some workplace plans are great while others are costly and inflexible. And some plans might be great for certain employees -- just not you. So how do you know if your workplace plan is worth contributing to? Read on to find out.

Signs you have a bad retirement plan

A bad retirement plan is one that significantly restricts your ability to earn a profit on your savings. This can happen in a few ways. First, your retirement plan might offer a poor selection of investments that don't suit you. If you invest too conservatively, your savings won't grow as quickly, and you will have to contribute more of your own money to save enough for retirement. If you invest too aggressively, you risk a major loss you may not be able to recover from by your chosen retirement date.

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Some investments can also be bad simply because they carry high fees. Most 401(k)s, for example, give you a choice between a handful of mutual funds your employer selects. All mutual funds have an expense ratio or an annual fee you must pay. This is a percentage of your assets, and it can range from under 0.5% for some index funds to over 1.5% for some actively-managed funds. How much you actually pay depends on how much you have in your account. For example, if you have $1 million in a mutual fund with a 1% expense ratio, you'll pay $10,000 per year. Keeping your fees as low as possible helps you keep more money for your retirement.

Retirement plans have other fees too, which cover things like record keeping and one-time actions like account rollovers. These costs vary by plan, though larger companies are usually able to offer more affordable retirement plans because they can split these costs among more employees. 

There is no hard-and-fast rule for what's considered a high-cost retirement plan. You must decide for yourself what you're comfortable paying. But if you're giving away more than 1% of your assets in fees every year, it's worth exploring other options to see if you can do better elsewhere.

A company-matching contribution can help redeem an expensive workplace retirement plan, assuming the match you're earning is enough to cover what you're paying in fees. But you have to consider the vesting schedule. This dictates when you get to keep your match if you leave the company. If you don't plan to stick around until you're fully vested, you'll forfeit some or all of your match. In that case, you must consider the value of your workplace retirement plan apart from any matching contributions it offers when deciding if it's right for you.

Alternatives to your workplace retirement plan

Whether you think you have a good workplace retirement plan or not, it's worth comparing it to some of these alternative retirement savings accounts before deciding which is best for you right now.


An IRA is a popular alternative to workplace retirement plans, because anyone can open one with any broker. There's also fewer limitations on what you can invest in. This gives you more freedom to choose affordable investments that match your risk tolerance, which could help you grow your nest egg more quickly than you could with your workplace plan.

The biggest downside to an IRA is that you may only contribute up to $6,000 in 2021, or $7,000 if you're 50 or older. That's less than a third of the $19,500 you may contribute to a 401(k) in 2021 ($26,000 if you're 50 or older). So if you plan to contribute a lot to your retirement this year, you may need to pair an IRA with another type of account.

Health savings account (HSA)

Though not technically a retirement account, a health savings account (HSA) actually fits the bill pretty well. Your contributions reduce your taxable income for the year, just like traditional IRA and 401(k) contributions. Plus, there's the added bonus of tax-free withdrawals on medical expenses regardless of your age. Some HSAs also enable you to invest your funds just like you would with a retirement plan.

The catch is, you must have a high-deductible health insurance plan to contribute to an HSA. That's one with a deductible of $1,400 or more for an individual or $2,800 or more for a family. If you meet this criteria, you may set aside up to $3,600 in an HSA if you have an individual plan or $7,200 if you have a family plan in 2021.

Taxable brokerage account

Taxable brokerage accounts aren't retirement plans either, but they enable you to invest your money with no restrictions, and you can take your funds out at any time without fear of penalties. You don't get the same tax breaks as you would with a retirement account. You pay income tax on your contributions in the year you make them and you'll owe taxes on your earnings as well. But if you hold on to your investments for at least a year, they become subject to long-term capital gains tax, which can save you money compared to paying income tax on the same amount.

You don't have to limit yourself to a single account

If you're torn between two types of retirement accounts, you can always put some money in both. Or start with one and switch to another if you max out the first. For example, you could start saving in an IRA and then return to your workplace retirement plan if you reach the IRA annual contribution limit for the year. 

The right solution ultimately depends on your workplace retirement plan, your financial situation, and your long-term goals. These things can change from year to year, so remember to set aside some time annually to look over your options and decide where you'd like to place your retirement savings.