If you are an employee and your employer offers you access to the company 401k plan then by all means you should probably participate. Especially if your employer is making contributions! But be advised that there are some disadvantages to being involved in a 401k.
The first potential problem with a 401k may be that the provider offers either poor performing funds or a poor selection of funds or both! Let's imagine that you are in the final five years before your retirement and you have determined that you have too much exposure to the stock market. Go to one of my previous articles for the simple formula to gauge what percentage of your portfolio should be invested in stocks. There are a lot of 401k providers that don't give you many options to accomplish this adjustment.
I am a participant in a leading 403b provider for ministers and their fund selection is woeful and left me pretty vulnerable in the great down turn of 2018. I finally made capital preserving adjustments but I wasn't entirely happy with my choices. If you haven't been on your 401k website and studied all the resources that are available to you then get to it immediately.
The first potential problem with a 401k may be that the provider offers either poor performing funds or a poor selection of funds or both! Let's imagine that you are in the final five years before your retirement and you have determined that you have too much exposure to the stock market. Go to one of my previous articles for the simple formula to gauge what percentage of your portfolio should be invested in stocks. There are a lot of 401k providers that don't give you many options to accomplish this adjustment.
I am a participant in a leading 403b provider for ministers and their fund selection is woeful and left me pretty vulnerable in the great down turn of 2018. I finally made capital preserving adjustments but I wasn't entirely happy with my choices. If you haven't been on your 401k website and studied all the resources that are available to you then get to it immediately.
A second disadvantage of a 401k versus an IRA is that you don't have as much access to your money should the need arise to borrow. When you do borrow the money the consequences can be harsh. If you withdraw money from your 401(k) account before age 59 1/2, you will need to pay a 10 percent early withdrawal penalty, in addition to income tax, on the distribution. For someone in the 25 percent tax bracket, a $5,000 early 401(k) withdrawal will cost $1,750 in taxes and penalties.
A third potential drawback to a 401k is the fact that most providers encourage the practice of "dollar cost averaging". This practice simply means that you keep re-investing into your account regardless of whether or not the fund is doing well or not. When the market is roaring along this works pretty well. But when the market is down or volatile...not so much.
If you are a dollar cost average practitioner then you should be constantly monitoring the make up of your portfolio and weeding out the losers and exchanging them for winners. A 401k is a lot like a garden in that respect. You need to tend to your account. Too many employees blindly trust their employers to put them into a good provider and many let their employer choose the fund. How foolish!
If you have the chance to get into a 401k then by all means do it. Just remember that there can be some dangers to be avoided.
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