Insights

If Your 401(k) Lacks in This 1 Area, Run the Other Way

The money you save year after year in your 401(k) plan shouldn’t just sit there in cash. You’ll need your nest egg to keep up with inflation so you don’t lose buying power as a senior. To that end, it’s important to invest your retirement savings wisely.

Hopefully, your 401(k) plan will offer a number of investment choices that help you put your money to work in a manner that aligns with your risk tolerance, strategy, and goals. But if that’s not the case, you may want to find a better home for your nest egg.

Image source: Getty Images.

Do you have enough investment choices?

Most 401(k) plans offer a decent mix of actively managed mutual funds, passively managed index funds, and target date funds. But if you’re not happy with the number of fund choices in your 401(k), it could pay to invest your long-term savings someplace else.

Vanguard reports that the average 401(k) plan last year offered 27.5 investment options. That figure was effectively unchanged from 2020’s average of 27.4 funds.

But some 401(k)s offer far fewer fund choices. If that’s the case for you and you also don’t love the specific options you have available, you may want to think about investing your money elsewhere than a 401(k).

Remember, if your plan offers limited investment choices, that could mean:

Paying hefty fees for your investments that eat away at your returns
Being forced to invest too conservatively (and ending up with less money down the line)
Being forced to invest in a manner that just isn’t what you want

And seeing as how it’s your retirement savings on the line, you deserve better.

Other options for investing for retirement

If you have earned income, you can open an IRA — either a traditional or a Roth account — and invest your money there. The upside of going this route is that unlike 401(k)s, IRAs allow you to invest in individual stocks, so you’re not limited to what could be roughly a couple of dozen funds. And more choices could also mean lower investment fees all in.

Another option is to forgo the tax breaks associated with IRAs and 401(k)s and invest for retirement in a traditional brokerage account. The benefit there is getting a lot of flexibility with your money.

With an IRA or 401(k), you’ll generally face penalties for taking withdrawals from your account prior to age 59 1/2 (though there are a few exceptions). With a traditional brokerage account, you can take withdrawals without penalty whenever you want. One of these accounts may be a good option for you if you think early retirement is in the cards.

Don’t sell yourself short

It’s a good idea to put enough money in your 401(k) to claim your full employer match. Beyond that, you really shouldn’t feel obligated to save and invest in a 401(k) if you’re not happy with your investment choices — especially when there are other options that could get you closer to your goals.

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