Although I couldn't start contributing to a 401(k) plan the moment I started earning a steady paycheck (thanks, student loans), I began saving for retirement in one of these plans in my 20s. Since it was a plan my employer offered, I figured it made sense to sign up and have contributions deducted from my paychecks automatically.
But in hindsight, I actually regret saving in that plan and think an IRA would've been a better choice for me at the time. Here's what I wish someone would've warned me about 401(k)s when I first got access to one.
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1. How high the fees can be
It costs money to administer a 401(k). But I didn't realize how high 401(k) fees could be. And I definitely lost money to them early on in my savings window.
It's common for 401(k) administrative fees to range from 0.5% to 2%. But if you ask me, I wouldn't want to invest in a plan that charges more than 1%. Remember, these administrative fees aren't the same as the investment fees (called expense ratios) you may be charged based on the assets you choose within your plan.
You can control your investment fees to some degree, such as by picking passively managed index funds over actively managed mutual funds. But those administrative fees are what they are. And you may find that it costs a lot less to have an IRA.
2. How limited the investment choices can be
When I first got a 401(k), I was excited to start picking stocks for my portfolio. But I quickly learned that 401(k) plans generally don't let you do that. Instead, you have to invest your money in different funds, which means you never a chance to customize your portfolio to your liking.
With an IRA, you can invest in stocks individually. I'd encourage you to do that if you're good at picking stocks, or if you're willing to learn. A portfolio you assemble yourself has the potential to beat the returns of broad market indexes like the S&P 500, leading to more retirement wealth for you.
3. How valuable a Roth savings option can be
The 401(k) I contributed to back in the day didn't have a Roth savings feature. And while a growing number of 401(k)s offer a Roth today, if yours doesn't, then you may want to choose an IRA instead.
The benefit of saving in a Roth retirement plan is that your investment gains are yours to enjoy tax-free, and withdrawals are tax-free once you're ready to take them. Not having to worry about the IRS taking a chunk of your savings is huge when you're retired and trying to budget on a fixed income.
Plus, Roth 401(k)s and IRAs don't force you to take required minimum distributions . This gives you more control over your savings.
If you have a 401(k) plan available to you, I'd advise you to contribute enough money to claim your full employer match. There's no reason to leave any of that on the table. But once you've snagged that match, consider putting money into an IRA -- especially if your 401(k) charges higher-than-average fees, limits your investment choices, and doesn't offer a Roth savings component.
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