While the most important thing is that you’re saving for your retirement and there shouldn’t be anything discouraging you from doing that, there are some disadvantages of a 401k account that should be considered when building your retirement savings plan.
These accounts are set up through your employer. When you leave a job you can take the account with you to your new employer, leave it where it is, cash it out (with penalties), or roll it over to an independent retirement account.
When you choose to set up a retirement account with your employer they hire a financial company to handle your account and decide what options will be available to you. This is the first disadvantage of a 401k — less control over your account options.
This extends to a variety of things with your account, mainly the types of the accounts you can set up and your investment options.
Most often you will be limited to traditional accounts, which mainly means in contrast with some other options out there your contributions are taken from your pretax income. This is neither a positive or negative aspect on it’s own, it depends on what your circumstances and personal preferences are. When you make contributions from your income before taxes are taken out you will end up paying taxes on your withdrawals in retirement, but you will have more money now to invest and build up your savings with. The only real negative here is that the option is taken from you.
Another aspect where this level of control comes into play is your investment options. Your employer will have set out a couple of different investment plans for you to choose from, typically separated by risk level. A lot of people like this because it simplifies things and they don’t have to know a lot about stocks or other investments in order to invest. Others prefer having more control and being able to pick each investment on their own.
If you’re upset about the disadvantages of a 401k, but like the perks of the account, you can always consider opening both one of these accounts, and look at other options like IRAs (independent retirement accounts) to set up on your own and diversify your investments a bit.
