||[Apr. 12th, 2006|08:53 am]
I've been reading this book about how 401Ks are a hoax. The book goes on and on about how the government promotes using 401ks and throws what seems like great benefits at people to further fund big business. And that when it's all said and done most people's 401k portfolios will not be nearly enough for one to retire on. |
I honestly got tired of the book half way through because it was all negative and offered no real solutions/alternatives for people.
Anyway, I just changed jobs and tried to rollover my 401k from Mass Mutual to Charles Schwaub or however you spell it, only to find out that I got ganked. Actually the words they used were "You were only 25% vested" so I didn't earn my company match.
So now I'm just now finding out that I have to put time in and earn my company match? I feel hustled.
So the question is....is there a real reason for someone like me who honestly will probably change jobs every 2-3 years, to put money in a 401K? Granted, I did get to keep 25% of the free money but is there a chance I would see greater returns elsewhere?
The best thing about a 401(k) is that it means that you're doing at least some savings. Too few people do much to save for their retirement. And by saving using pre-tax dollars, you lower your current tax bill (raising your future one). Plus, though you've seen that there are restrictions (including vesting), there may be matching employer contributions. And a 25% automatic return on your investment, depending on the investment period (how long were you at Mass Mutual?), is nothing to sneeze at.
That said, there are other ways to save using pre-tax (IRA) and after tax (Roth IRA) dollars. A 401(k), however, let's you save a lot more per year (up to $15,000 this year, or more if you're over 50, if memory serves) than either type of IRA. Full disclosure: I'm 45, and have been maxing out my 401(k) contributions for the past five years (since my employer started offering the plan), but my employer doesn't offer any match. My eldest works part time, and I've told him to open a Roth IRA (I'm not eligible). An IRA usually gives you greater flexibility in picking your investments.
Again, the bottom line is that if you do almost any kind of savings, you're ahead of the game, and the more, the better. Follow basic rules when it comes to your savings (be more aggressive when you're younger, more conservative later, and pay careful attention to after-tax return on investment), and you should do well.
Lots of people contribute to 401k's without any employer match. Especially if it is a good plan. (i.e. good funds, low expenses, and most or all of the maintenance expenses paid by the company.)
You get to invest the money tax free, and all earnings are tax free. If you save outside of an IRA or 401k, you end up paying taxes on the interest and possibly capital gains on your savings every year, even if you don't take any out! That hurts on April 15th.
(Some or all of it is sheltered from bancruptcy and so guaranteed for your retirement and some other nice benefits.)
And different companies have different rules on the vesting. Some match 20-25% a year over the first 4 or 5 years. Some don't start the vesting until year 2 or something. i.e. you work 2 years, and you get 0. You work 3, you get 25%. But some vest immediately. Every dollar of match is yours.
So all of this comes down to the terms of your 401k. Look at the match, the vesting schedule (if any), the available funds, and the expenses on the plan. If there's no match (or a really slow vesting schedule), and the expenses are really high and the funds aren't so hot, then take your money elsewhere.
And 401k's are a bit of a hoax, in that you really need to be saving something like 15-20% of your income if you want a comfortable retirement. Doing something like 4% with an additional 2% employer match isn't going to be much come age 65.
But it is all a matter of total compensation. Do you want the company funding a traditional pension plan and giving you a 20% pay cut today? The company doesn't really care how they pay you. They can give you cash and let you put it in the 401k (or spend on something else if you want), or they can put it away for your retirement.
And do you want to have to work for the same company for 40 years to get that traditional pension? And do you trust that they'll be there when you need it? (See Delta and the other airlines...)