For us at Farther, it comes down to three things: employer contributions, investment options, and fees.
If you have an employer that matches your contributions, investing up to the match should be your first choice for retirement savings. Otherwise, you’re leaving money on the table. If your employer doesn’t match, or if you’re saving beyond your match, we need to look at your investment options next.
401(k)s tend to have a fairly restricted set of investment options available. In good plans, this benefits most people by simplifying the choice of what to invest in and reducing the risk of accidental inappropriate selections. Not all plans are good plans though. Some only provide very expensive or poorly performing funds, and they may not provide exposure to all the assets you need to build a well-diversified portfolio. If your plan doesn’t have a wide array of index fund options or a low cost suite of target retirement funds, an IRA might be the better choice. That will come down to fees.
401(k)s are notorious for their hidden fees. While participants are supposed to receive fee disclosure each year, these are hard to parse through and often skipped over entirely (when did you read your last 404a fee disclosure?). If you don’t work at a large public company, odds are you’re paying quite a bit more for your 401(k) than you might expect. It’s not uncommon to see employees pay 1.00-1.50% of their assets each year to the recordkeeper, plan advisor, and auditor for medium sized plans, and small plan fees can be much higher. That’s $2,500-$3,750 for an account with $250,000 in it each year. On the other hand, IRA fees can vary quite a bit as well. Traditional financial advisors often charge 1.00-1.50% to manage IRA assets, while Farther only charges 0.40-0.80%.
If you’re not in an amazing, low-cost 401(k), an amazing low-cost IRA might be a better option. If that’s the case for you, get your match, max out your IRA contribution, and then start contributing to your 401(k) to make the most of your savings. And be sure you don’t leave your money in old, expensive 401(k)s once you leave your job either. Roll them over to your IRA whenever you change jobs.