One of the best perks of being a salaried worker, as opposed to being self-employed, is getting access to employee benefits. Depending on your company, these could include subsidized health insurance, paid time off, and access to a retirement plan.
If your employer offers a 401(k), there may be a matching incentive involved. Vanguard reports that 95% of plans on its platform offer some type of matching program.
If you have access to a 401(k) plan with a match, you should aim to contribute enough money to snag all of that free money. But does it pay to fund your 401(k) beyond your employer match? Or you should find another home for your remaining retirement plan contributions? Ask yourself these key questions to land on the right decision.
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1. Am I happy with my plan's investment choices?
One drawback of 401(k)s is that they commonly limit you to a number of funds to put your money into, as opposed to letting you invest in individual stocks. That could make it difficult to build a portfolio that meets your needs and matches your risk tolerance. It could also mean facing hefty investment fees, depending on the specific funds you choose.
Mutual funds, for example, tend to come with high fees, known as expense ratios. And while target date funds have long been a popular 401(k) investment, they, too, are notorious for higher fees. If you're not happy with the investment options offered in your 401(k), then there's no need to save beyond the point of your match when you could put your money into an IRA and get a wider range of choices.
2. Am I looking to spend a lot of time choosing stocks for my portfolio?
It's one thing to only fund your 401(k) up to your match and then contribute to an IRA if your intent is to hand-pick stocks for your retirement portfolio. But if you know off the bat that you're not willing to do that work, then you may be better served keeping all of your savings in your 401(k) -- especially if that plan offers a low-cost index fund you can fall back on.
It's pretty common for 401(k)s to offer some broad market funds, like S&P 500 index funds, that give you exposure to the stock market on a whole. And because index funds are passively managed, their expense ratios tend to be minimal.
3. What fees does my plan charge?
In addition to the investment fees you might face in a 401(k), you'll also have to deal with administrative fees. You'll frequently find 401(k) fees in the vicinity of 1%. But if your plan's fees are higher, that's reason enough to only fund your 401(k) up to your match and then put your remaining savings into an IRA.
You don't want to pass up free money in your 401(k) if you can help it. So if your employer is willing to match 401(k) contributions, put in enough to get every free dollar you're eligible for. But beyond that, you have choices. Answer these questions to figure out where the rest of your savings should go.
