The 401k is one of the best tools for putting yourself on track for a prosperous future. As pensions have fallen out of style, the 401k has risen to take its place, giving people of all walks of life a chance to build their nest eggs.
And the good news is, when it comes to choosing the right 401k, you’re off the hook: Individual consumers don’t actually get much direct input on what company runs their 401ks.
You should still know why your employer picked the plan it did and how it affects you. Here’s a basic primer on who picks your 401k plan and what you can do if you don’t like the choice for your retirement savings.
You Don’t Pick Your 401k Plan, Your Employer Does
A 401k is an employer-sponsored retirement plan, so by definition, it’s going to be your employer making the decision on which one to use. So, you might simply be at the mercy of your HR department in terms of which company it is that’s administering the 401k plan.
That doesn’t mean there’s absolutely nothing to be done. If you’re looking for a new job, you can inquire about the company’s 401k plan and potentially make a decision based on which plan it uses. Likewise, you can also ask your current employer important 401k questions: Inquire with your HR department for the reasons why it selected the plan it did and whether it would consider a change.
It’s also worth noting that the difference made by the specific company administering your 401k is likely minimal. The factors that will really matter aren’t specific to the plan itself. The returns on your 401k investments will have everything to do with your selections. The tax benefits of contributing to your retirement fund apply to any qualified 401k and any matching program is defined by your company and not the 401k plan.
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The I in IRA is for “Individual”
If you’re really dead-set on going outside the 401k plan selected by your company, you do have options — namely an individual retirement account. An IRA is essentially the same as a 401k save for one key detail: It’s not run by your employer, so you can choose whichever type of IRA you want.
If you really don’t want to use your employer plan, you could forego any contributions and simply put that money into your own IRA. You can get tax advantages with an IRA, but you won’t be able to get the matching contributions that many employers offer with their benefits. Another downside: The yearly maximum contribution to an IRA is $5,500, but a 401k is $18,500.
You can also just wait until you move on to a new employer, at which point you can roll your 401k over. If you chose to roll it over into an IRA, you’ll be able to pick the option you want.
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The Best 401k Is One You’re Contributing To
Some important differences exist between 401k plans. For example, the plans often have differences in fees that could add up quickly.
But focusing on these factors could be missing the forest for the trees, particularly when your role in choosing the company managing your 401k plan is going to be minimal to nonexistent.
Ultimately, what will make a much larger difference is the rate at which you’re contributing to the plan and whether or not your company offers matching contributions. Not only do you fund your 401k with pre-tax dollars, but you can see its value grow if your employer offers matching contributions.
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So, even if the 401k plan at your job isn’t exactly what you want, you’re usually best served by making contributions and taking advantage of whatever plan you have access to.