Your employer offers a 401(k) plan as a great benefit for you.  You have always heard you should max out your 401(k) if you can afford to.  That’s $19,500 in 2021, or $26,000 if you’re 50 or older. That’s a lot of money, but you can pull it off. But first, I’d like you to think if this is the best way to invest your hard-earned dollars. I think there are 5 main factors for you to consider in evaluating your 401(k) plan.

First, what is the employer match? The most lucrative match formulas usually have a dollar for dollar match. That means for every dollar you contribute, your employer matches a dollar up to a specified percentage of your salary.  Typical matching formulas may match up to 3%, 6% or 8%. The higher the match, the better.  Other matching formulas offer a percentage match such as 25 cents for each dollar or 50 cents for each dollar.  Generally, if a plan offers a match, then it makes sense to contribute to a plan up to that amount at a minimum. Afterall, a dollar for dollar match provides an immediate 100% return on your contribution. That’s a heck of a return! Also, keep in mind that employer matches are in pre-tax dollars versus Roth dollars. If there is no match at all, then other factors come into play. In fact, you may decide not to contribute at all.

Second, what are the administrative costs of your plan?  401(k) plans come with various fees that aren't always evident to the investor but can greatly impact your account's return over the long-term. 401(k) fees fall into two basic categories: those charged by the plan provider, and those charged by the mutual funds or ETFs in the account. This consideration focuses on those charged by the provider. Ranging from 0.25% to 2%, 401(k) plan fees can vary greatly, depending on the size of your employer’s 401(k) plan, the number of participants, and the plan provider*. Beware of fees imposed by smaller plans as there are less assets and fewer participants in which to spread out these fees. Ask your plan administrator or read your fee disclosure document to find out what plan fees you pay. If you are paying more than .5% (50 basis points) in plan administrative fees, you may want to invest up to the match and look elsewhere to save beyond that.

Third, does your plan offer a Roth option? If you are not able to fund a Roth IRA due to your income, this could be an efficient way to accumulate Roth dollars for your retirement.   

Fourth, does your plan offer a good array of investment choices at reasonable costs? Because of existing fiduciary laws impacting 401(k) plans, your plan will usually have enough choices to create a reasonable portfolio. But the mutual fund or ETF investment fees are another matter. Check out the prospectuses to make sure the funds have reasonable costs and, hopefully, you’ll have access to some low-cost, index-based funds or ETFs. If all the funds are expensive, then buyer beware!

Lastly, there may be personal reasons you want to use your 401(k) fully. Your income may be too high to fund a tax-deductible IRA or Roth IRA. Or you may just like the convenience of managing one bigger plan versus several smaller ones. Be aware that convenience can sometimes be expensive over the long run.

In summary, there are a lot of moving parts when deciding how much of an investment your 401(k) deserves. If your plan is low-cost, has good, reasonably priced investment options, an employer match and a Roth option, it is well-deserving of your investment dollars. Otherwise, you may want to fund it up to the match and use other vehicles (IRAs, brokerage accounts) for the rest of your retirement savings. Feel free to contact me to discuss this article or if you need some assistance in making these important decisions.

Enjoy the journey!

* BrightScope, Investment Company Institute. "The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans," Page 41.