Bad Company 401k? There May be Other Options

It’s a good idea to invest in some sort of retirement plan at work. There are tax advantages, and your company might offer a matching contribution. Unfortunately, though, there are a number of bad 401k plans that include a variety of fund choices that are costly — with high fees that eat into returns. Others offer little in the way of diversity away from company stock. (You can get help evaluating employer 401k plans at www.brightscope.com.)

If you are dissatisfied with your company’s 401k, there is no reason to put too much of your money into it. Put in enough to earn your company’s highest match — you don’t want to leave free money on the table — and then consider these other retirement options as supplements:

Individual Retirement Account (IRA)

Anyone who has worked and has a tax return can open an IRA. Even spouses that don’t work can open a spousal IRA. Using Roth and traditional IRAs can be very helpful in terms of providing you a way to investing in a retirement plan without relying on what is available through your employer.

• Traditional IRA: You get to contribute to this account before taxes, lowering your taxable income. The deduction is completely phased out by the time you earn $66,000 in adjusted gross income. You can contribute up to $5,000 in 2010 (or $6,000 if you are at least 50).
• Roth IRA: If you are more concerned about tax-free withdrawals later in life, you can contribute to a Roth IRA as long as you earn less than $176,000 married filing jointly (phase out begins at $166,000). You contribute with after-tax dollars, so it doesn’t change your current tax efficiency, but you don’t pay income taxes on your withdrawals, like you would with a traditional IRA. Yearly contribution limits are the same as with a traditional IRA.

You can set up different IRAs for you and your spouse in order to contribute more.

Consider your spouse’s retirement plan

If you have a spouse that works for a different company with a better plan, you can coordinate your retirement plan investments accordingly. Run the numbers, and consider your asset allocation. If it works out, you can incorporate a good plan from your spouse into your overall retirement portfolio. Do what you can to make sure that your spouse’s plan offsets the weaknesses in your own company 401k plan.

Self-employed retirement plans

Some folks don’t have a company to work for, because they are self-employed. The good news is that you don’t have to work for “the man” in order to get the benefits of a retirement plan. You don’t even have to give up the 401k. If you are self-employed, you can create your own solo 401k. This is a way for you to direct your own retirement plan investments, while still getting a tax advantage, even if you don’t have a traditional job that provides traditional benefits.

It is also worth noting that if you have a side business, you can open your own self-employed retirement plan. Keogh plans, SIMPLE IRAs and other options exist, and you can use your side business as a way to boost your retirement plan contributions outside what is offered from your more traditional day job.

Bottom line: You have to watch out for your own retirement, since no one else is going to do it for you. Do your due diligence on your company’s 401k, and decide whether or not it is something that works for you. Contribute only what you must to get the match, and then put your head earned cash into retirement plans that align more closely with your retirement goals.