What Are Some Disadvantages Of A 401K?

What are some disadvantages of a 401k? Taking money out of your 401k before retirement can be expensive as any loan must then be paid back with after tax money in addition to the interest, plus there can be severe penalties and possible forfeiture of your 401k if you fail to repay.

While a 401k is generally a sound financial deal, there are some disadvantages. No savings plan is perfect, after all and your investments are subject to the state of the economy, to some extent. One disadvantage is the ease with which you can borrow money from your 401k - making it tempting to do so. "Taking money out of your 401k before retirement can be expensive as any loan must then be paid back with after tax money in addition to the interest, plus there can be severe penalties and possible forfeiture of your 401k if you fail to repay," warns Paul DLouhy, an independent investment analyst and tax advisor.


Hopefully your money is safe in a 401k plan, although you don't have the luxury of having your investment protected by the Pension Benefit Guaranty Corporation (PBGC) which safeguards the assets of most pension plans. And ultimately your money is only as safe as the investments and funds that you invest it in - any investment plan carries some degree of risk and uncertainty.




401k plans are generally a safe and effective method of saving, although if you choose to put your money in certain more risky investments, your account may not grow as quickly as you anticipated.

As to the amount that you can invest, DLouhy points out "You are limited in what can be invested by what your employer offers. And in some cases, employers will not contribute to your 401k plan or match your contributions." It is a major disadvantage if your employer does not match contributions, but not one that should stop you from participating. (See question 8)

If you are planning to invest as much as you can, there are also limits to the amount you can invest in a year, as well as possible limits on the amount your employer may match. And if you are a new employee making contributions to a 401k plan, you may have to wait several years before your contributions become vested (meaning they become your property)

Another potential disadvantage of 401k plans are the fees and charges, often hidden away in small print or obscure regulations. Warns DLouhy "Sometimes the fees associated with an employers 401k can be high - thereby reducing your growth rate" If you invest in mutual funds, make sure they are what are true 'no-load' mutual funds, meaning there is no cost to get in and out of. If you are not sure about hidden fees, they should clearly be explained in the prospectus issued by the mutual funds. There may also be fees associated with withdrawing money from your 401k or transferring the money into another account.

Many people make the understandable mistake of investing heavily in their company's own stock with their 401k money. The danger here is that if your company does go bankrupt, you will lose all those shares. Experts advise that a holding of around 10% of your portfolio as your company's stock is considered to be a safe amount. DLouhy points out that "company losses can destroy any profits in your 401k plan - ultimately your 401k funds are only as secure as the investment they are in"

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