It has come to your attention that your new job—the one with the awesome salary, dream title, and beer fridge and ping-pong table in the break room—doesn’t have a great retirement plan. There’s no match. There aren’t enough investment options. The fees are sky high. This quickly becomes the thing you miss about your old job. Not the break room—that one had air hockey—but the retirement plan, of all things.
Is there a better way? Should you try to DIY your retirement savings yourself, or suck it up and enroll?
Focus on your own contribution first
Before you think about your employer’s match, consider what you can contribute to your retirement savings on your own. Basing your own contribution on what the match is could put you at a savings disadvantage.
If guides for retirement savings say you should be socking away 15-20% of your income each year and you’re only stashing away 3% because your company’s match will make it 6%, you have some personal work to do.
By the way, that match rate? The average in 2019 is 4.7%, according to Fidelity. If you’re used to something like 4% or 5%, entering a job with a company that only matches 1%—or worse, zero—can sting a bit. But at the end of the day, any match is free money, and as such, you should take advantage.
Even if there’s no match on the table, that doesn’t necessarily mean you should opt out of your company’s plan. “Any mechanism that helps you save and invest for retirement, while lowering your taxable income, is generally a good thing,” Anjali Pradhan, a CFA and investment coach for women, said. Bottom line: one way or another you need to be saving for retirement—and likely saving more than the minimum match amount, at that.
How to evaluate your company’s retirement program
Just because your employer offers a retirement program doesn’t mean you don’t have to evaluate it like any other financial decision. “Most 401(k) plans are outsourced to a financial institution that offers the participant limited freedom in choosing their investments,” Pradhan said. If you’re not offered a match, you may want to open a traditional IRA in an online brokerage account that can give you more investing options with potentially lower fees. The average 401(k) offers 29 different investing options, so if you’re seeing far fewer options in your company’s plan, that might be a sign to look elsewhere. This post has a breakdown of some funds to look for in your employer’s plan, but you can also choose them if you’re investing on your own.
When you’re comparing your 401(k) and IRA options, look at the expense ratios for the available funds. Anything below 1% of your assets is considered acceptable, although it’s becoming more common to see expense ratios down at the 0.15-0.25% range. Also keep an eye out for administrative fees—there’s usually nothing you can do about these if you’re already signed up for a particular program. Beyond that, choosing between the two may come down to the mutual funds available and your personal preference.
Consider a mix-and-match strategy
One reason you may still want to sign up for a less-than-stellar 401(k) program: The higher contribution limit. “A traditional 401(k) still offers a nice tax advantage, so it’s a good way to save for the long term,” Zuzana Brochu, a CFP and Senior Vice President at People’s United Advisors, explained. “And you can contribute up to $19,000 a year, or $25,000 if you are over the age of 50,” she said. IRAs are capped at just $6,000 per year.
Before you go it alone, check to see if your employer offers a Roth 401(k). Brochu explained that the typical Roth IRA income limits don’t apply to these accounts, and you can also contribute up to $19,000 per year.
She also says a mix-and-match strategy may work for some people. If you don’t have access to a Roth 401(k), and know you can’t max out both a 401(k) and a Roth IRA, “Consider contributing a certain amount to the employer sponsored 401(k) to take advantage of the match and the tax shelter and a certain amount to a Roth IRA to take advantage of the tax-free growth,” she said. That way, you won’t be stuck when you hit the IRA contribution cap. For example, if your employer matches up to 3% of your salary, you may choose to take them up on that 3% match, but also contribute a portion of your income to an IRA that you maintain.
Once you’ve exhausted your tax-advantaged options, consider setting up a taxable investment account for additional contributions, Brochu said. “You’ll pay taxes as you go along on any capital gains, but you will still be much better off in the long run than if you hadn’t made these additional contributions toward your retirement.”
Whatever you choose, automate it
If you don’t have access to an employer-sponsored retirement plan or choose to DIY it instead, make it easy to make regular contributions, Pradhan advised. “To mimic the ease of a 401(k), automate transfers into your IRA account so that you don’t have to think about it,” she said. “It becomes a fixed expense like paying your mortgage or car loan.”