What do you do if your employer  doesn’t match contributions in your 401(k) at all? Should you just go with your own retirement plan?

As the saying goes, not so fast! Last week I talked about how many employers match your contributions to a 401(k) plan—often dollar for dollar or 50 cents on the dollar. This is free money. But it’s not the most important part of a 401(k)—it’s the dessert not the main course.

Like I said last time, the two most important things about a 401(k) plan are 1) it is simple and automatic and 2) it is tax-deferred.  None of that changes if the plan lacks a match. So in my view, for the vast majority of Americans who have one, the 401(k) is the place to start.

I want to flesh out why the simple and automatic is important. Say you take a new job and they have a 401(k) with no match. If you fill out the paper work, sign up to contribute 6%-8% of your before tax salary, and pick investments, it is set it and forget it.  After that you’ll be investing a little bit at a time—usually every two weeks or once per month. The pros call that dollar cost averaging, and it helps you buy more when the market is low and less when the market is high.

On the other hand, if you don’t fill out the 401(k) paper work and think, “Instead I will do this on my own,” you are going to have to set everything up by yourself. For most people, that’s like starting a diet or redoubling their exercise. We want to do it, but often we don’t or we procrastinate.

What if I don’t like my plan? Should I walk away from my 401(k)?

As a general rule, I don’t think people should walk away from a 401(k).  These days most 401(k) plans are in really good shape.  Years ago costs and quality were sometimes an issue, but there were lawsuits over the years so employers have gotten religion over them and brought their A-game.  

But, even if you are in the rare situation that your 401(k) has some mediocre choices, not all of the investments in your 401(k) have to be amazing for you to enjoy good returns. You really only need a few of the investments in your portfolio to be good to have a lot of success. Find the best options, make sure you are diversified, and go with them. Figuring out which investments are worthwhile is easier than you might think. You can spend an hour on Google and go from being skeptical about your to realizing that it’s a great retirement tool.  

Does that mean that it would never make sense for someone to pursue a different option?

While I love the 401(k) and really believe that it works for people, there are situations where it would make sense to go in a different direction. When you change jobs, it often makes tons of sense to switch to an IRA. The average American goes through 11 jobs in their lifetime; can you imagine trying to keep track of ELEVEN different plans?  When you switch jobs, you can  roll old 401(k)s into an IRA—ONE IRA. What you want to do is put your rollover IRA with a fund supermarket such as Fidelity or Schwab. Once the money is there you can select a diversified mix of funds with low fees and strong long-term performance.  


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