Have 401ks Become Too Risky?

A traditional 401k retirement plan is generally the default employer provided option for most people. For most people, the 401k plan they are investing in is not a terrible option by any means. However, it is also far from the best option. To be perfectly honest, most people stick with their 401k plan for no other reason than it is easy.

It takes virtually no work to enroll in an employer provided 401k program. One little trip to the HR department and the funds begin being automatically deducted from the employees paycheck. After that, most people tend to forget the money is even being taken out of their check until they get their account statement. Unfortunately, most people would be shocked to learn just how much they are missing in the name of convenience.

More Fees and Fewer Options

The main selling point of the 401k is the promise of sustained growth. While few people view their 401k as the path to independent wealth, they do assume, based on the way in which the accounts are marketed, that they can expect long-term sustainability and growth. People are ok with small growth margins from their 401k because they assume that is how it is going to perform from the beginning.

Unfortunately, many 401k management programs hit customers with a variety of fees and maintenance charges related to the daily operation of their 401k plan. Because the 401k operates on such a small growth margin in the first place, these fees can often end up costing the 401k owner hundreds of thousands of dollars over the life of the account.

Calling these hidden fees is sort of a misnomer because it implies employees are being actively deceived or lied to. The simple truth is most people don’t even know where to begin looking for these fees on their account statement. They also make a giant mistake and assume that all 401k plans are the same. This could not be further from the truth. Individual employers have wide latitude when it comes to negotiating the particulars of the 401k program they provide for their employees. It should surprise exactly no one that many employers cut company costs by shifting management fees and account charges onto their employees.

If Not the 401k, Then What?

The first thing that anyone unhappy with their company sponsored 401k plan should do is contact their human resources department and explore their options within the parameters of the company program. However, flexibility is usually limited based on what is best for the company. Switching retirement accounts is the most desirable option in most cases.

Depending on individual income levels, one of the best alternatives to a low quality company 401k program is going to be some form on an Individual Retirement Account. The main benefit of a privately funded IRA is that the policyholder has full disclosure regarding the terms of the account from the start. They are free to pick-and-choose the parameters of the program. Additionally, since an IRA is available in both a traditional form or as a Roth variety, it generally considered just as flexible about tax concerns as the 401k.


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