Ask an Advisor: I’ve Been Saving in My 401(k) for 16 Years but My Company Doesn’t Contribute. Should I Invest Elsewhere?

I have had a 401(k) for the past 16 years with modest gains. My company doesn’t contribute any match. Does it make sense to discontinue my contributions and put the money in a different investment? Should I leave what’s in the 401(k) account or move it? – Lisa

This is an interesting question, particularly given the time period. You started investing in the plan just after the Global Financial Crisis, and the S&P 500 is up over 700% cumulatively since 2010. Even without an employer match, it’s reasonable to question why gains don’t seem consistent with what the market has done.

In this context, it’s natural to wonder whether your retirement savings would be better off somewhere else, especially if you’re not receiving the boost afforded by matching contributions. But in my opinion, the lack of an employer match is probably not the most important consideration in deciding whether to continue contributing. Retirement plans still provide many other benefits worth taking advantage of.

Plus, there are other factors that impact performance that should be ruled out before making any changes to your deferral elections (or moving your assets altogether).

Do you have a similar question you’d like answered? Consider speaking with a financial advisor who serves your area.

Assess Performance Before Making Changes

When investment performance doesn’t meet expectations, our natural impulse is to assume the grass is greener elsewhere. This is particularly common in retirement plans, where investment options are often limited to what your employer makes available. We think that with more flexibility and control over what we invest in, performance will improve.

But that isn’t necessarily the case. Many workplace retirement plans today offer strong investment options, often including institutional share classes with lower expenses than what individual investors would typically pay. If that’s the case, then moving your money elsewhere may not meaningfully improve your results after accounting for fees. Most plans also offer low-cost index funds that keep pace with markets, so if that is how you would invest in a personal account, then there may be little reason to move assets or stop contributing.

Before concluding that poor investment options are the reason for modest returns, evaluate how your portfolio is invested. Does the portfolio align with your goals, time horizon and risk tolerance? If you’ve maintained a relatively conservative allocation, modest returns may simply reflect your asset allocation.

On the other hand, if your investments have consistently lagged appropriate benchmarks despite an allocation aligned with your objectives, then it may be worth reevaluating the funds you’ve selected.

After looking into your asset allocation, consider how actively you manage the account. The S&P 500 return I mentioned earlier is what an investor would have earned (before accounting for any index fund fees) had they not touched their account for 16+ years. If you are regularly turning over your portfolio and changing investments, then the timing of those trades may significantly impact results. In fact, studies show that individual investors often underperform the market and can do so by a wide margin. ¹

(If you’re ready to turn over the management of your portfolio to a professional, speak with a financial advisor and see how they can potentially help.)

More Than an Employer Match

Turning back to the matching contributions, it’s easy to think of a company match as the primary benefit of an employer-sponsored retirement plan. After all, it’s free money.

But, in my view, tax treatment is an equally important benefit. Traditional 401(k) contributions reduce your taxable income today while allowing your investments to grow tax-deferred until retirement. For many higher-income households, that deduction alone can create meaningful value year after year.

The tax diversification benefits afforded by these plans are also compelling. Building wealth across pre-tax retirement accounts, Roth accounts and taxable brokerage accounts gives you greater flexibility later in life and hedges risks that come with changing tax rates over time.

When retirement income comes from multiple tax “buckets,” you have more control over how much taxable income you recognize each year and can make more informed decisions around distributions, capital gains and tax planning, which is especially important with future tax rates being unknown.

High contribution limits are another major benefit. A 401(k) allows you to save substantially more than an IRA each year. If your goal is maximizing long-term retirement savings, giving up that additional tax-advantaged opportunity is often difficult to replace.

Don’t overlook the Roth option, either, if your plan offers one. Unlike Roth IRAs, Roth 401(k)s don’t have income limits that prevent higher earners from contributing. While you won’t receive a tax deduction today, qualified withdrawals in retirement are tax-free. Again, this can support tax diversification objectives and potentially provide more flexibility.

Lastly, perhaps the most underestimated benefit of company retirement plans is the automatic deductions. Successful savers and investors tend to be the most consistent in their habit of adding new money to their accounts over time. Retirement plans execute this habit for us.

Automatic deductions break down one of the biggest behavioral obstacles we face: deciding every month whether or not to invest the cash in our bank account. It’s easier and provides more immediate gratification to go out and spend it. If you think this would be a risk, it may be prudent to leave the money in your plan and maintain your contributions on these grounds alone.

(If you have questions related to tax planning, portfolio management or different retirement accounts, consider working with a financial advisor who offers financial planning.)

Understand the Rules Before Moving Money

Before executing any asset transfers, remember that your options depend on both IRS rules and your employer’s plan.

Many people assume they can roll money into an IRA whenever they want to, but that’s often not the case while you’re still employed. Some plans permit in-service rollovers after reaching a certain age, while others require you to separate from your employer first.

Understanding those rules before making any changes can help you avoid unnecessary complications and penalties.

Putting it All Together

While it’s tempting to view underwhelming returns and the absence of an employer match as reasons to abandon your 401(k), I think that misses the big picture. There may be asset allocation, investment selection and trade timing reasons behind your perceived underperformance. Even without an employer match, 401(k) plans still provide individual investors with many tax and behavioral benefits.

For many investors, the answer isn’t choosing between a 401(k) and another investment account. It’s using each account for the role it plays best. A well-designed financial plan may include a workplace retirement plan, Roth savings when appropriate and taxable investments working together.

Viewed through that lens, your 401(k) can remain one of the most valuable pieces of your long-term financial strategy, even without an employer match.

Retirement Planning Tips

• A financial advisor can help you plan and save for retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Your retirement savings target should change as your income, expenses and goals change. Review your contribution rate after major events, such as paying off debt, buying a home, having a child, changing jobs or receiving a raise. These moments often create chances to increase savings before new spending absorbs the extra cash.

Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Jeremy is a financial advisor and head of business development at DBR & Co. He has been compensated for this article. Additional resources from the author can be found at dbroot.com. Please note that Jeremy is not a participant in SmartAsset AMP and is not an employee of SmartAsset.

Photo credit: Photo courtesy of DB Root, ©iStock.com/designer491, ©iStock.com/AndreyPopov