Contrary Thoughts on Contributing to 401(k) Plans

It seems everyone from Suze Orman to your mother-in-law preaches advice on contributing the maximum amount to your 401(k) plan at work every year, but is it always the wisest thing to do?

Here’s a contrary idea to put up against the conventional wisdom of maxing out your 401(k): only contribute the minimum amount that will get you the maximum employer match. Retirement funding heresy? Perhaps, but what else is a person to do when there is only one paycheck and several demands on it—none of which is unreasonable or frivolous?

At this point, you’re probably scratching your head. “But Suze Orman always says…” is undoubtedly ringing in your ears. Suze doesn’t have kids to feed, utility bills to pay, or a car payment to make—she’s already set for life, but you aren’t. Why bother parking your excess contribution money in the plan when there are other ways to use it?

I’m speaking of an individual retirement account, either taxable or non-taxable. Going outside your employer-chosen retirement plan offers you greater flexibility of investment choice and contribution amount.

If a greater need for the money exists at home, then by all means, do use that excess money to pay bills off completely. Debt reduction is the fastest way to earn a large return for your money, and piece of mind to boot. Those psychological dividends are hard to beat!

Once those bills are gone, though, you do need to harness the discipline to invest that excess money for your retirement years, whether with your employer or not. You also need to harness the discipline to quit racking up bills again in the first place. Having the money disappear off the top of your check may help keep YOU in check with debt—through your employer’s 401(k) plan or an automatic deposit to a mutual fund or index fund outside your work place.

Remember what happened to the employees at Enron? This is why you don’t want to tie up every penny of your retirement money with your work plan—because one day, work won’t be there any more, meaning you’ve lost everything or can’t access any money you’ve ever contributed. After that horrible public lesson in mindless investing, countless people STILL throw their entire retirement savings AND matching funds into company plans which usually use it to buy company stock and nothing else, doubling their own risk.. Oh, and let’s not forget the lockouts—those times when employees can’t access their money to shift it or remove it, even though corporate officers are dumping their shares like smelly garbage. Executives talk up the stock and encourage employees to buy more, propping up the share price. One quick look at Morningstar will tell the whole performance story, and it would’ve saved many an Enron employee from such debacles.

Another scenario that would cause you to lose access to your own money: what if your company’s fiduciary officer dies without a succession plan for the future administration of the retirement funds? In this instance, the plan itself ties up your money because fees haven’t been paid to the administrator. The only way to access anything then is to quit your job and transfer your assets.

Something else to consider when choosing where to put your retirement funds: how much does it cost? Employer-sponsored plans are for the most part expensive relative to the performance of the plan offerings. Administrative fees can eat up modest contribution dollars quickly, whether in or out of a work plan. No-load mutual funds, index funds, or even I-shares have the lowest administration fees because the assets are passively or minimally managed—meaning minimal turnover per year by administrators. The less you pay in fees, the more the market is left to guide the performance of your chosen assets. The more you pay in fees, the more involved the asset manager is in guiding your assets to perform—either well or poorly, take your pick. The asset manager, in effect, is a third party between you and the market—an unnecessary one, in my opinion—and he/she can’t do any better than the market itself.

The worst part of all this is the monthly statements written in gibberish, that don’t explain a darned thing about where your money is, what it bought, or how it’s doing. Why take a chance on possibly losing ALL your retirement savings from a work plan, when you can spread it around among different places, along with the risk (not just market risk, but employer risk as well)? Access cannot be denied with an independent plan, as it can with a company plan. Performance can be gauged through a third-party site like Morningstar for free, so you always know how your money’s doing. Get your plan’s stock and bond ticker symbols (or those of your mutual fund or index fund’s holdings), enter them into a mock portfolio on Morningstar, and watch your year-to-date (YTD) performance any time—it’s that easy. Then you will know how your money’s doing, when to shift your money, and where to shift it.

For maximum control with minimal risk of loss, at least consider lowering your contributions to the minimum amount needed for maximum employer-match (so you only put half the account balance at risk) while parking the rest of your retirement money away from the company. Why go through your own private Enron-style employee hell if your company ever hits the skids?