Why I Am Not A Fan Of 401(k)'s

I cannot dispute the free money aspect. If your employer is matching contributions to your 401(k), you should absolutely take it. This post does not apply to 401(k)'s where your employer is matching your contributions. Some companies match employee contributions starting at 3% and go up from there.

I am referring to a growing trend today of employers offering company sponsored plans such as 401(k)'s and IRA's with no matching contributions. The poor economy forced many employers to suspend their programs of matching employee contributions. Some companies have not reinstated matching contributions and do not plan too.

With all things being equal, I would take a Roth IRA over a 401(k) every time.

1. 401(k) plans have short term advantages.

Give me a chance to get a tax deduction on a few thousand today or the chance to pay not taxes on millions of dollars later and I will take the second option every time. I like Roth IRA's better because I have full faith in my ability to build substantial wealth in the future. I figure that an individual can easily turn $100,000 in contributions into well over $1 million dollars over a 30 year time period. I would much rather forego the tax deduction on my contribution to not pay taxes on my capital gains. Besides I don't expect taxes to be lower in 2040 then they are in 2010.

2. 401(k) plans have limited investment options.

With a Roth IRA, you get to pick the investments that go into your plan. You can set your plan up at any brokerage and load up on your favorite stocks, mutual funds, exchange traded funds, bonds, certificates of deposit or whatever. With the help of a lawyer, you can even invest in real estate, private equity ventures, and partnerships. Companies often select the company that is the least expensive when selecting a 401(k) plan. The employee's portfolio is not the company's concern; saving the company money is the focus.

3. 401(k) plans have fees that can be difficult to figure out.

Have you ever tried to figure out what fees your 401(k) plan service provider is socking you with? Plan providers intentionally make it difficult to determine how much fees are affecting your portfolio returns. They often hit plan participants with investment fees, service fees, plan administration fees, sales charges, management fees, and the “miscellaneous fees”. Small business employees are the hardest hit by high fee 401(k)'s.  Since you pick the brokerage company for your Roth IRA, you can pick the lowest cost providers. Many brokers have Roth IRA's with fees as low as $10.

Final Thoughts

If your employer is matching your contributions, you would be foolish not take advantage of a 401k. However, if your employer does not match your contributions, you should max out your Roth IRA contributions first then fund the 401(k).

Why I Am Not A Fan Of 401(k)'s is a post from: Buy Like Buffett

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