When it comes to retirement planning, a 401(k) provides an excellent opportunity to prepare for the future while also enjoying certain tax perks now. However, like any investment product, a 401(k) should be used wisely in order to gain the most benefit from it. As you continue to save and plan for the future, watch out for these potential problems regarding your 401(k).
Limited options. Your 401(k) allows you to invest in different asset classes, such as large-cap stocks, small-cap stocks, investment-grade bonds, and so on. However, some might find these options too limiting.
If you’re interested in more diverse investment options, like cryptocurrencies, gold, and more, you might find a 401(k) too limiting. These options are often available through an Individual Retirement Account (IRA), which might be an option to you depending upon your situation.
Fees. Some fees will be associated with certain aspects of your 401(k). That is normal and to be expected. But over time you could pay a significant sum of money in fees, so it’s worth investigating this issue. Don’t look at only your “bottom line”; investigate different fees and incorporate that expense into your decision making process.
Your plan might change. When your 401(k) plan is employer-based, that means your employer could choose to change providers at any time. Or, they can make changes to the plan itself, such as adding or dropping certain funds.
Loans might require instant payment. Generally speaking, you should avoid taking a loan from your 401(k) plan anyway. But sometimes, such as during an emergency situation, this option becomes necessary. But if you later leave your employer for any reason, that loan might require instant repayment. For this reason you might feel “trapped” with your employer, and influenced to give up more desirable positions elsewhere. Or, you might suffer a cash flow problem when switching employers.
None of these potential drawbacks are reasons to abstain from contributing to a 401(k), which is still a worthwhile and valuable retirement planning tool. They are simply things to take under careful consideration when making decisions regarding your plan. For more information on these topics, or anything else related to your 401(k), give us a call and we’ll be happy to help.
