Bad 401(k)? Don’t Despair!

401k roadmapOur clients (and blog readers) already know that a 401(k) is a key component of today’s retirement picture. Since most people don’t have pensions nowadays, you’ll need a workplace retirement plan, along with Social Security and personal savings, to keep you afloat for thirty to forty years in retirement.

So what happens when your company’s 401(k) leaves much to be desired?

Don’t despair. Keep reading!

1. Your company offers no 401(k) at all.

I got a call today from an enthusiastic young saver who had money to save for retirement, but no plan at work (sadly, he said they used to offer a 401(k), but terminated it, probably to avoid making the employee match. Shame on them!).

This is arguably the worst situation to be in. Your employer offers no retirement plan, but since you’re an employee (and not self-employed), you can’t open a true plan of your own, and are therefore limited to IRAs.

Solution: You can still fund a Traditional or Roth IRA (maximum: $5,500 contribution per year). Plus, you can save on your own in a non-retirement account. You won’t get a deduction for that, but can make up for it by enjoying 24/7, no-penalty access to your money and the right to use the lower 15% capital gains rates on growth.

2. Your company offers no 401(k), but you can morph into a self-employed consultant.

This won’t work for the rank-and-file, but we’ve seen several cases of VIW’s (Very Important Workers) who were able to transition from “employees” to “self-employed consultants.” They continue providing services to the company (and perhaps other companies as well) on a consulting basis.  As consultants, they can set up their own retirement plans and deduct contributions of $50,000 or more per year. This works well for the talented elite, and frequently allows them to charge more for their services and benefit from less-stressed, more flexible work schedules, as well.

3. Your workplace plan is awful, but you can be covered under another retirement plan.

Sad to say, some of the worst plans we’ve ever seen are those offered through local school boards. They hook up with insurance companies and aggressive brokers, who offer commission-laden plans with surrender charges that lock you in for seven years or more. Don’t teachers deserve better?

We rarely tell clients that they are better off NOT contributing to a workplace plan, but when we do, you can bet they work for a school board or another educational institution.

Does this mean an end to your retirement savings ambitions? Not necessarily. You can always fund your Roth or traditional IRA (but beware, since you may be “covered” by a workplace plan, income and deductibility limitations will apply). You can also save in a non-retirement account, but if you are really lucky you can possibly be covered under a family member’s business retirement plan

Here’s an example. Sandy is a teacher, and she’s chosen not to contribute at work since all the plans are weighed down by commissions and long surrender charges. Her husband Bob runs a business with a SIMPLE-IRA plan. Sandy does marketing and accounting work for Bob in her off-work hours. If Bob pays her a modest salary from the family business, she can contribute up to $14,500 per year to a SIMPLE retirement account (she’s age 50), and deduct it all, plus Bob will throw in a 3% match.

4.  You do have a 401(k) plan at work, but the investment options are sparse.

There’s nothing wrong with a plain vanilla plan. You can save the fancy stuff for your personal portfolio. As long as there is at least one decent stock choice, one decent bond fund, and/or a good asset allocation fund, you can make do.

We would rather see an inexpensive but straightforward 401(k) plan, than one with dozens of expensive and mediocre investment choices. Getting the deduction, and earning an employer match, can outweigh some minor investment compromises.


About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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