Do I Really Need to Contribute to a 401(k)

Today, many workers are failing to take full advantage of their 401(k) s. One can find numerous legitimate reasons for this. For all the reasons in the world, in failing to take advantage of your 401(k), (or other company sponsored retirement plan) you guarantee yourself the failure to taking advantage of the most powerful force in the universe according to Einstein, compounding. Compounding

This is a powerful force that relies on the nonrenewable resource of time. As time decays and your retirement draws near, you cannot go back and make it up. As time passes you will be forced to make more difficult decisions and increase your risk the farther you are from your nest egg goal. There are usually no black and white decisions in investing, just shades of grey. But failing to take advantage of your 401(k) should be a clear decision.

I am often asked how much should I put in. At a minimum I urge you to max out the match. Use that phrase when talking to your companys retirement specialist or contact human resources for details of your companys plan. Typically it is based on your base pay and a mathematical formula which differs from company to company. Maxing out the match is identical to giving yourself a raise. It may only be a few percent points a year, but who cares, when has anyone walked into a casino turning town free upfront house money. And over the long haul of investing, those few percentage points snowballs into a considerable amount.

What Choices You Have Makes a Difference

After that consider how much else you can put away. Nearly everything accessible in your 401(k) is accessible in an outside account. However if you are dollar cost averaging with your company stock, it may make more sense to purchase it within your 401(k) to keep trading cost low.

What to do with the excess money you are able to invest varies case by case. You need to determine the quality of funds and investment options within you 401(k). For example, a client worked for a prominent telecom company. They had a reputable financial company managing their 401(k). However, perhaps the telecom company was attempting to keep maintenance fees to a minimum; they selected a plan with a limited amount of fund choices. Of those funds, I reviewed, I felt over 80% of them were underperformers with excess risks. So we maxed the match by allocating his contribution into the few good funds he had to select from. The remainder of investment his dollars was blended within a proper mix of his and his wifes Roth IRA, 529 plans for his children, and an annuity. Once again, that proper blend varies from individuals so consult a qualified advisor if you have question regarding your situation. What should I get?

If you are a value investor, and if there are quality value funds within your plan, I would consider taking advantage of them.