More than a year ago, long before it went into Chapter 11, General Motors stopped matching workers' contributions to 401k retirement plans. Since then, one-fifth of U.S. employers have done likewise or at least reduced the amount of their matches, according to a survey by consulting company Watson Wyatt.
If your employer is one of these, it's time to consider shooting a sacred cow -- by dropping out of the 401k system.
Suze Orman would have a fit. Contributing to your 401k is as basic a touchstone in personal finance as original sin is in theology. But absent the incentive of an employer match -- in which the company matches your contribution with its own contribution in limited fashion -- plenty of 401k plans aren't any good.
And excellent retirement plans are instantly available from any mutual fund company or discount broker in the form of Roth or traditional individual retirement accounts.
So don't stop saving for retirement. Just put the boss's plan up against the competition's and choose the one that's best for you.
That means the plan that gives you the most flexibility for the lowest cost. Very large company plans are apt to emerge as winners even without employer matches. So is the federal government's.
But the vast majority of plans are sponsored by small and midsize companies, and very often they stink. The plan administrator is apt to be the owner's stockbroker or insurance agent, offering lousy choices and high fees.
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Here are the four key issues that should help you decide whether your company plan is worth your contributions. If it's not, stop making them. Instead, open an IRA with a vendor that can provide what you need on the cheap.
1. How much do you save?
Federal law allows much greater contributions to 401k's than to IRAs. The limit for 2009 is $16,500 for the former and $5,000 for the latter. If you're 50 or older by the end of the year, these limits rise to $22,000 and $6,000, respectively.So if you are saving more than $400 to $500 a month and want the tax benefits of a retirement plan, you are stuck with the company plan for some of your nest-egg dollars.
Also, IRAs have strings that limit their usefulness to highly paid workers. If you have what the Internal Revenue Service terms modified adjusted gross income of more than $65,000 (single) or $109,000 (married, filing jointly), you may not be able to deduct IRA contributions from your taxes.
Similarly, if your modified adjusted gross income is more than $120,000 (single) or $176,000 (married, filing jointly), you can't make contributions to a Roth IRA, the nondeductible version of the IRA.
Most of us, however, are not affected by either of these considerations.
Video: Manage your 401k in 1 minute
2. What does it cost?
Plans such as GM's and Uncle Sam's offer outstanding investment options at rock-bottom prices. So do big-company plans from providers like Fidelity Investments, the largest such operator, and Vanguard Group.But the small-company market is dominated by high-cost providers such as load-bearing mutual fund and insurance companies. Indeed, frequently we see postings on MSN Money's Start Investing message board from participants in plans that offer C shares of mediocre mutual funds.
C shares have no upfront loads or sales commissions, as A shares do, and no rear-end loads, as do B shares. So they resemble no-load mutual funds but charge an extra 1% in annual fees. A random example: AIM Large Cap Growth C (LCGCX) has an expense ratio of 2.08%, according to Morningstar, substantially more than the 1.33% charge at AIM Large Cap Growth A (LCGAX).
Insurance company funds, most commonly found in 403b plans for teachers and public employees, are even more expensive, tacking on insurance charges that bring the total to well more than 2%.
Because every penny taken in the form of expenses is at least a nickel you won't have in retirement, you want low-cost funds. How low? Try to pay significantly less than average. Here, from Morningstar, are the averages for the most commonly held fund types.
| Group | Expense ratio |
|---|---|
Large cap | 0.73% |
Midcap | 1.00% |
Small cap | 1.03% |
Natural resources | 0.93% |
Technology | 1.36% |
Health care | 0.71% |
Developed international equity | 0.93% |
Emerging international equity | 1.18% |
Note: asset-weighted averages / Source: Morningstar
Finally, don't overlook plan fees. Many employers foist all 401k expenses onto workers, including administrative overhead. If you pay more in 401k fees than a fund company such as Vanguard would charge for an IRA, consider switching to the IRA.
Continued: How good are the funds?
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