401(k) plans are convenient for saving for retirement, but some individuals may not appreciate certain aspects of them. One drawback is the restriction on purchasing individual stocks for retirement within a 401(k) account. Additionally, some people may feel dissatisfied with the limited selection of funds available, particularly if they prefer to have more control over their investment decisions.
You might also not be satisfied with the administrative charges. 401(k) plan Fees are often associated with 401(k) plans, typically ranging from 0.5% to 2% for administrative costs. However, if your plan falls towards the upper limit of this range, you might be unhappy with it.
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There is no requirement that you must contribute to a 401(k) for retirement just because your employer offers this option. However, if you choose not to participate in the 401(k) program when there is a matching contribution from the company, you may regret it later on.
Choosing not to accept money that is freely available is not a wise decision.
Among the various errors one could make with their 401(k) plan, such as being overly cautious with investments or neglecting to monitor investment fees, missing out on an employer match is by far the most significant. By forgoing an employer match, you not only miss out on receiving complimentary funds but also miss out on the opportunity to invest and potentially increase the value of that money.
Suppose you decide not to participate in your company’s 401(k) plan, forfeiting a $2,500 employer match for this year. You may believe that $2,500 will not have a significant impact on your retirement savings in the long run.
However, if you are 25 years old and do not plan to retire for another 40 years, you will also be missing out on the potential gains that could have been made on the $2,500 over those four decades. Assuming your 401(k) earns an average annual return of 8%, which is slightly lower than the mean of the stock market. So, if that $2,500 goes missing, it will ultimately result in you losing more than $54,000. That is a significant impact.
Always take advantage of a 401(k) matching contribution offer.
According to Vanguard, half of its 401(k) plans offered a matching contribution in 2023, with 36% of plans having both a matching and a nonmatching employer contribution. This means that employer matches are prevalent in 401(k) plans. Therefore, before deciding not to contribute to your employer’s plan, check if there is a matching contribution available and make sure to take advantage of it.
If you discover that an IRA offers lower fees, it might be a better choice to invest the remaining portion of your retirement funds into it. Additionally, if you prefer selecting individual stocks over being limited to investing in index or mutual funds, then opting for an IRA is the way to go.
Make sure to contribute to your 401(k) up to the amount your employer matches before anything else so you can take advantage of the extra money available to you. Missing out on this opportunity could result in a significant financial gap in the future.
