2014 “FXStreet. The Forex Market” All Rights Reserved. Every effort is made to provide accurate and complete information. However, with the thousands of documents available, often uploaded within short deadlines, we cannot guarantee that there will be no errors. Any republication or redistribution of FXStreet content is expressly prohibited without the prior written consent of FXStreet.
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.
Any opinions, news, research, analyses, prices or other information contained on this story, by FXStreet, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. FXStreet will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Dear Lifehacker,
I want to put a little something away for the future, but Ive heard a lot of people say that maybe my companys 401(k) isnt the place to keep my money. Should I invest on my own, or stick with what my employer offers? Should I do both? How can I tell if my 401(k) is good or bad?

Sincerely,
Forward Thinker

Dear Forward Thinker,
Well, first of all, congratulations! Whether its retirement, a future where you just want to work less and do other things more, or youre planning for unforeseen costs like medical expenses, youre already doing it right by thinking ahead.

The core question you have, though, is whether its best for your money to invest in your companys 401(k) retirement plan, or whether you should strike it out on your own and do your own thing--either by opening an IRA or putting your money into some other investment vehicle. Here are a few ways to tell.

How to Tell a Good 401(k) from a Bad One

Dont discount your employers retirement plan out of hand. Putting your money into one is generally a good idea, especially if youre not doing any other saving for the future. Whether you plan to retire in the traditional sense, or you just want to make sure you have money in the bank when you get older, socking money away now is a smart decision, and your employers 401(k) can have some strong benefits. Here are some things to keep in mind if youre weighing the merits of your 401(k):

  • All 401(k)s offer pre-tax deposits that reward you for saving money. This is the biggest benefit of any pre-tax savings program. Since the money goes right into your retirement account, you its not taxable income on your paycheck. t's tax-deferred so you can get out from paying income taxes on it until a time when, presumably, youll be retired and in a lower income bracket.
  • A good 401(k) comes with a strong matching contribution from your employer. Most companies offer a 401(k), but the best ones match your contribution up to some percentage of your salary. If your company offers a match, you should at least contribute enough to get the full value of that match--otherwise youre leaving free money on the table. The higher the percentage match, the better you come out for contributing.
  • In a good 401(k), your employer contributions vest quickly. Matching contributions from companies usually have a vesting schedule, or a period of time over which the money becomes truly yours. If your employers contributions vest over two years, for example, that means half of whatever they put in to match your contribution is yours at the end of the first year. After your second year of employment, all of their contributions are yours. If you leave before the end of the second year, they get that half back. Vesting schedules vary from company to company, so make sure you look at yours. Some companies vest over a year or two, others have vesting schedules as staggered out as five or six years. This is partially used as a way to discourage you from taking the matching money and leaving, but a quick vesting schedule is a good thing to look for in a retirement plan.
  • A good 401(k) has a wide selection of funds to chose from, from a well-regarded financial institution. Another good sign that your companys retirement fund is a good one is if the servicer is a well-regarded financial institution with a solid history. Sure, given the economic issues in recent years, it might be tough to think of anyone as well-regarded, but the companies that stuck it out and turned their funds around are the ones you want to look for. Similarly, if your retirement fund offers a wide array of low-cost funds to choose from for people with different savings goals, its worth a good look. If your company only has a few bad or expensive funds to choose from, you may be better off striking it out on your own. Some companies get the most barebones 401(k) plan available just to say they have one.
  • Good 401(k)s dont cost you tons of money in fees. A wide selection of funds is nice, but its also important that they have low fees. Low fees typically mean higher returns for you. High fees mean that the financial management fund makes a ton of money on your retirement plan, but thats all money that youll never see. Compare and contrast those fees--sometimes clearly labeled, other times bundled up under your funds expense ratio--across funds in your plan. Then compare it with the fees youd pay if you opened an Individual Retirement Account, or IRA (in which you usually have more choices). Ratios under 0.1% are generally considered good. Under 0.5% is considered okay but not great, and anything higher, especially over 1%, is a serious warning sign. Our own Whitson Gordon offered up some more info on this here, but if the funds your company offers are high-fee, youre better off investing just enough to get an employee match (if there is one), then taking the rest of your money to an IRA. This interactive guide from PBSs Frontline walks you through how fees add up. If youre looking for help rooting them out, previously mentioned FeeX or FINRAs Fund Analyzer, which weve also highlighted, can help you compare them to other funds, and show you how much youll pay in fees over the life of your account, whether its a 401(k) or an IRA.
  • Good 401(k)s dont pass along administrative fees to employees. This one is a bit complicated to measure, but this piece from US News Money breaks it down nicely. Ultimately you want to know whether the administrative costs for the plan are being paid by the plan administrator (your employer) or its participants (its employees). In the case of the latter, all of those great features--investment seminars, financial experts, brochures, and more, are all paid for by you, not your employer. Check and see if your plan has revenue sharing as well--where things like marketing and sales associated with the plan take a bite out of your bottom line as well.

This isnt an exhaustive list, and not every plan will hit all of the points here. Some plans have a great match but bad fund selection. Others will have great funds, but no match. If your employer offers other perks for enrolling in their 401(k), by all means, take advantage of them. Some companies will sign you up and contribute a percentage of your salary to an account automatically, breaking down the barrier to you having to do it yourself. Others have financial planners available to talk through your specific situation with. If you can take advantage of those services, by all means you should.

Either way, once youve run through this list and taken measure of the plan you have available, you can move on to the next step, turning what you know into a strategy that works for you.

Get the Most Out of Your 401k and Combine it with Other Options

So now youve looked at your 401k and found its pros and cons according to the list above. Now its time to create a strategy that leverages its strengths and ignores its weaknesses (as much as you can). You dont actually have to choose a 401(k) or something like an IRA--you can use both. The previously mentioned Ladder Method is a great way to make the most of a bad financial situation, or of bad investment options.



 2014 “FXStreet. The Forex Market” All Rights Reserved. Every effort is made to provide accurate and complete information. However, with the thousands of documents available, often uploaded within short deadlines, we cannot guarantee that there will be no errors. Any republication or redistribution of FXStreet content is expressly prohibited without the prior written consent of FXStreet.
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.
Any opinions, news, research, analyses, prices or other information contained on this story, by FXStreet, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. FXStreet will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

 2014 “FXStreet. The Forex Market” All Rights Reserved. Every effort is made to provide accurate and complete information. However, with the thousands of documents available, often uploaded within short deadlines, we cannot guarantee that there will be no errors. Any republication or redistribution of FXStreet content is expressly prohibited without the prior written consent of FXStreet.
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.
Any opinions, news, research, analyses, prices or other information contained on this story, by FXStreet, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. FXStreet will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.