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Ask a Fool: My 401(k) Has High Fees. Should I Contribute to an IRA Instead?

By Matthew Frankel, CFP® – Jun 16, 2017 at 1:00PM

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Even if your 401(k) is expensive, it could still be smart to participate.

Q: All of my 401(k)'s investment options have excessively high fees. Would I be better off just saving for retirement in an IRA instead?

The short answer is that you should probably still use your 401(k), at least for some of your retirement saving needs.

I generally consider "high" 401(k) fees to be anything above an expense ratio of 1%, which is the percentage of your assets that are going to fees every year. In other words, a 1% expense ratio can turn a 5% gain into a 4% gain, and the difference can really add up over time. Many retirement plans offer fund choices with low expense ratios of 0.2% or less, but others, especially those offered by smaller employers, are full of high-cost investments.

Regardless of your 401(k)'s fees, if your employer offers a matching program, it's typically still a good idea to contribute enough to your 401(k) to take full advantage. If your employer offers to match your contributions dollar-for-dollar up to 5% of your salary, for example, you're getting an instant 100% return by contributing. Of course, even with a bunch of expensive funds, it's still important to compare the funds in your plan to find the best options, both in terms of fees and investment suitability.

What should you do with your money beyond your employer's matching program? I generally suggest trying to save at least 10% of your salary for retirement, not counting employer contributions. So, once you've contributed what your employer is willing to match, you're probably better off putting the excess into an IRA.

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