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Limited Investment Options in 401(k)s

Limited Investment Options in 401(k)s post image increase retirement account

I’ve written before about taking a 401(k) match if your employer offers it and we’ve been blessed that my husband has such a plan and match at his job.  It’s basically free money so he puts in enough to get the match.

However when some invest in their company’s 401(k), they may find that their options in what to invest in are limited. What can you do then? Should you skip out on the 401(k) or should you take what is offered?

Contribute to Get The Match

First off, if you get a match for the 401(k), contributing enough to get the match is smart move. If the options are very limited than just get the match and direct the rest of money into an IRA where you can have more low cost selections.

Keep Your Mutual Expenses Low

When exmaining the investments available in the 401(k), besides looking at the performance, you should check the fees involved.  With actively managed mutual funds, the fees come out of your contribution, so you’re the one losing out.

How Fees Hurt Your Retirement

Why should you care what your mutual found fees are? There are a couple of reasons. According to MorningStar, the low cost funds have another advantage:

In every single time period and data point tested, low-cost funds beat high-cost funds.

Over time, these fees lower your return, sometimes dramatically. Take for an example of similar investments based on a $50,000  contribution and how fees can quickly eat up your money:

mutual fund costs

That’s almost $12,000 more in your pocket!

Review Your Asset Allocation

Of course, your 401(k) is just one piece of the puzzle. Whether you decide to retire early or later in life, you want to make sure that all of your accounts have their assets allocated according your retirement goals.

The main idea behind proper asset allocation is maximizing your portfolio’s return while minimizing your risk. While maximizing returns seems clear, risk is subjective and differs person to person.

You want to make sure that you’re not duplicating investments. Instead see if you can keep your overall portfolio diversified.

Thoughts on 401(k)s

I’d like to hear from you about your retirement accounts. How many of you have 401(ks) that offer a match? How many of you take advantage of it? What do you invest in for your 401(k)?

Photo Credit: Alan Cleaver

by Elle Martinez

Elle Martinez helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..

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  1. Consider an in-service rollover into an IRA (where you can choose all of your investments) if it’s allowed by your company. We did this last year and plan to rollover this year’s contributions and matches, too.