Investing in your 401(k) is absolutely crucial to your future financial security, and as such, it is important to know how hidden fees and other 401(k) provider practices can impact your investment. With investing, as in life, it is often the unexpected things that have the biggest impact. Keep reading to find out how certain aspects of typical 401(k) plans may impact you.
Variable Annuities are Not Necessarily the Best Choice
If you purchase your 401(k) plan through your insurance company, it may be packaged as an annuity, particularly if you are a teacher, professor, or employed by a non-profit. These plans are more expensive than the average 401(k) plan, since the insurance company typically will require you to pay an additional fee in addition to the expense ratio that you are already required to pay. Although it must be said that the majority of insurance companies simply would not be able to compete with other 401(k) providers if they did not charge these fees, critics point out that the extra charges are often covertly taken out of your total investment return. The only way to know if you are being charged, in most cases, is to carefully review your investment prospectus.
Very Few Companies Offer the Roth IRA vs. 401(k) Option
Why? The reasons vary by company, but are more than likely due to the fact that Roth IRA’s were not originally meant to be permanent options for employees. With a Roth IRA, as opposed to a traditional 401(k) investment plan, you pay the taxes on future withdrawals before you make them, allowing you to withdraw on a tax-free basis in the future. If your company does not offer the Roth IRA option, and you would like them to do so, don’t hesitate to approach the benefits department to ask why and how such an option might be implemented at a later date. Remember-it’s your money, and your future on the line.
Value Funds and Company Stock Options are Not Necessarily the Best Choice
It may seem like a wise, and loyal investment to put a good portion of your 401(k) in company stock or value funds, but this is not always the case. Younger employees may be tempted to invest heavily in these areas, and most financial planners agree that this is a decision they will come to regret later. Company stock investing can lead to disaster if your company goes belly-up, and a large proportion of your 401(k) is invested in the stock. Likewise, value funds, although they do protect your savings, generate much less of a return than stock and bond funds generally do, and should be invested in with careful consideration.
Investing in Your 401(k) : Get Informed, Stay Informed
Investment choices made today can dramatically shape your financial outlook in the future. Be sure to educate yourself in all aspects and options of your 401(k) plan, and meet with your personal financial planner on a regular basis to determine the best course of investment action for you.