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I started a new job nearly 2 months ago. I am in the same industry I've been in for 10 years, just switched to working for another company. I went from a company of 6 people to a company of about 25 people. My new employer does not match contributions to their 401k ("for now, might start later").

My question is, should I even bother enrolling in the 401k plan? I do not know what investment options are available to me, but if there's no matching funds, what's my incentive? Would a better alternative be to start a Roth IRA and pick whatever I want to invest in? Are there other options I should look into?

What should I do? I am 40 years old and have always put money into a retirement plan offered by my employer.
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What you contribute to the 401k reduces your AGI (Adjusted Gross Income), and subsequently your IRS tax bill... for now. 401k's are a tax deferred investment so eventually, on withdraw/distribution, you'll be taxed on those at that time. The premise is that typically you have a lower tax rate in retirement than you might have now.

Additionally, if you are ineligible for a ROTH tax FREE (currently) IRA because of too high an income, the reduced AGI may bring your income down to where you might be eligible for a partial/full Roth IRA contribution.
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Your incentive would be the tax deferral of your contributions and growth of the account.
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My question is, should I even bother enrolling in the 401k plan? I do not know what investment options are available to me, but if there's no matching funds, what's my incentive? Would a better alternative be to start a Roth IRA and pick whatever I want to invest in? Are there other options I should look into?

What should I do? I am 40 years old and have always put money into a retirement plan offered by my employer.


What do you mean by "I've always put money into a retirement plan offered by my employer"? Do you put in enough to get the match and little, if anything, more? Do you put in more so that you can max out the amount the law allows you to put in ($18,000 for a 40 year old this year)?

Unless you've had a really generous match (like a 100% match on 7% - 8% of your income), just putting enough money to get a match into your employer's plan, and not saving anywhere else (IRAs and/or taxable accounts) is likely not going to be enough to fund your retirement. And just contributing enough to a Roth IRA ($5,500/year max) from now until you change jobs or your employer decides to do a match is almost certainly not going to put enough money toward your retirement.

On average, starting by age 25 or so, you probably should have been putting 12% - 15% of your income toward retirement in order to save enough. If you haven't been putting that much away, now at age 40, I would suggest that you probably need to be putting away even more, so you might actually want contribute to more than one account.

As to what type of account, it's probably best to have all 3 types of accounts: tax deferred (traditional IRA/401(k)); tax free (Roth IRA/401(k)) and taxable. That way, when you get to retirement, you will be better able to structure your income to minimize taxes.

Your incentive to contribute to your employer's plan is: Since it comes out of your paycheck before you even get paid, it's an easy consistent way to put money away toward your retirement. Plus you can save more ($18,000) in a 401(k) than you can in a Roth IRA ($5,500).

Downfalls for a 401(k): Since you don't know what your investment choices are, you probably also don't know what the annual costs are, and many small employers end up with high cost plans. If your costs are more than 1% of the balance each year, then you might want to look at investing in taxable accounts instead. And since your prior employer is also a small employer, if you haven't already rolled your account balance into an IRA, I would suggest checking to see what your costs are, and again, if over 1% of the balance per year, you should probably start the process to roll the balance to an IRA sooner rather than later.

AJ
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LLeone,

You wrote, I started a new job nearly 2 months ago. I am in the same industry I've been in for 10 years, just switched to working for another company. I went from a company of 6 people to a company of about 25 people. My new employer does not match contributions to their 401k ("for now, might start later").

My question is, should I even bother enrolling in the 401k plan? I do not know what investment options are available to me, but if there's no matching funds, what's my incentive? Would a better alternative be to start a Roth IRA and pick whatever I want to invest in? Are there other options I should look into?

What should I do? I am 40 years old and have always put money into a retirement plan offered by my employer.


To answer this properly, we probably need to know a few more things. For instance:

1. Are there any cheap fund options in the plan?
2. Does the employer have you paying any of the plan expenses?
3. Are you able to contribute to a Roth IRA even if you don't contribute to the 401k?
4. How much do you need to contribute tax-deferred savings?
5. How long do you think you will be with this employer?

So I'm afraid there is more research you need to do if you want a useful opinion from the board.

I've personally never worked for the same employer for more than 8.5 years. My own assumption has generally been that I will change jobs before the cost of the retirement plan out-weighs the cost of not making pre-tax contributions. But this isn't a valid assumption for everyone. (And 8.5 years could be pushing the limits of what I would say is reasonable.)

Pre-tax contributions save you real money on your taxes today. At least they do if you're making a decent wage. It might happen to you, but most people are not likely to exceed the (current) 15% tax bracket in retirement. In other words, you are likely to be at least 1 bracket below your current tax bracket. Also that's the marginal rate. Some of that income will be taxed in the 0% and 10% brackets. That means you will see tax savings now and in the future that can offset a fairly significant amount in plan expenses.

But that assumption has been sorely tested by one of my employers in the past. For 4 years I contributed to a plan where the average fund cost was 2%/year. (When I made an issue of this problem, management's response was, "But didn't you make money in your 401k?") In that plan I stuck entirely with one index fund. The S&P 500 index fund had a fee of ~0.5%/year. But worse, the fine print showed that the plan was also drawing 0.25%/quarter of asset balances to cover plan expenses and sales commissions. That meant investing in the S&P 500 was costing me 1.5%/year. But it was the cheapest fund, so that's where all my money went.

Since the expenses are on-going for as long as you are employed there, it's important to have an idea how long you plan to stay if your 401k plan is like mine was. In my case, 1.5% was probably cost-prohibitive if I'd planned to set new tenure records. As it was the company folded after I'd been there for 4 years and I rolled the funds out immediately. But had I remained for 20 years, just squirreling money into my taxable accounts probably would have been a better choice because the funds would have eaten like 1/3rd of my potential asset values, which is far more than the tax savings would have been worth to me. But at 4 years, the loss was tolerable.

Anyway, that anecdotal information was just to illustrate why more information is needed. You just saying, "I started a new job and there is no company match for the 401k. Should I bother enrolling?" Doesn't provide much actionable information. I appreciate that you don't want to bother researching the available investment options. But if you don't know anything about them and what they will cost, how can you decide if it's worth enrolling?

I'm sorry, but I think you have some legwork to do.

- Joel
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The incentive is
1. automatic investment. You do nothing, and the contribution comes out of your payroll check
2. the ability to put 18k into your 401k, as opposed to just 6.5k in an IRA.
3. you do get some additional legal protections. But for most, this isn't an issue.
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