The Disadvantages of 401(k) Plans - Things You Must Know

What are the disadvantages of 401(k) plans?

When compared to other retirement plans, the maximum annual contributions are higher and there are typically employer contributions, as well. So, the accounts typically grow faster than traditional IRAs.

If you only consider those factors, it can be difficult to find a possible disadvantage. The plans seem like good ideas.

But, everything really depends on how the contributions are invested.

Employers are allowed to offer company stock as an investment choice, which could be good or bad. Just like investing in any company’s stock, it could mean high earnings or severe losses. Enron employees, who lost all of the money they had invested in company stock, suffered severe losses.

Other company employees, on the other hand, have typically enjoyed regular annual earnings.

Companies that strongly encourage employees to invest contributions in company stock are breaking a basic guideline concerning diversification.

But, the trust laws concerning the practice are vague. Companies aren’t always penalized. It is really up to you, the retirement investor to be sure that your portfolio is fully diversified.

There are no disadvantages of 401(k) plans for employers. They are cheaper for employers to maintain than are pension plans and other benefit packages.

Many companies pass the costs that there are along to their employees. Those employer advantages are the primary reason that nearly every company now offers a 401k.

Other than the higher annual contribution and the employer-matched contributions, there are no advantages for an employee, when compared to a traditional or a Roth Plan.

Many people like the idea of a Roth, because earnings within the account are unlimited and distributions are never taxed.

Since 2006, it has been possible to choose the Roth-401k, if the plan has the proper amendment. Most large companies offer both options.

There are some disadvantages of 401(k) plans that are not completely self-directed. Although you have some investment choices with any plan provider, you may be restricted to stock market investments, government bonds, money markets or mutual funds.

Those are only a few of the options that are available under the IRS tax law.

With a self-directed account, employees can invest in real estate, tax liens, mobile homes, car paper and private companies.

The account holdings can be used to make loans to individuals and earn interest equivalent or higher than that earned by banks.

The only disadvantages of 401(k) self-directed Roth plans are for people that do not want to begin taking distributions by the age of 70 ½.

Only with a Roth IRA, not a Roth-401K, could you leave the money alone. When (or if) you are ready to take distributions, is up to you.

If you would prefer to leave the account for your beneficiaries, that’s your decision.

All things considered, the Roth self-directed account is the only one with no actual disadvantage, unless you really need the tax deduction, today.

There aren’t too many disadvantages of 401(k) plans or any other retirement plan.

Saving for your future is always smart. Just remember to diversify.