Not all retirement plans are created equal. The variation in quality between plans is huge.
At AboveBoard we’re fans of simple, clear language (even if it summarizes complex analysis). We’ll call the retirement plans that fall short of being good plans “crappy”.
If you're lucky enough to have a match from your employer, then contributing enough to max out the match makes sense.
The question of whether an employer-sponsored retirement plan is the best place for your money comes up on the unmatched portion.
How to Tell If Your Workplace Retirement Plan is Good - 401(k), 403(b), 457(b), etc.
A good plan offers a range of low-cost investment options. There should be a solid selection of low-cost index funds. Having reasonably priced actively managed funds on offer, too, is nice to have, but it's not essential.
The information about the investment choices that your plan provides should make it easy to assess performance of the different investments after fees, like your employer actually cares about you having enough useful information to choose good investments.
This is entirely possible and does exist.
Unfortunately many employer-sponsored retirement plans are not so good.
What Makes a Crappy Retirement Plan?
Here's one way to tell: look for whether you can buy a low-cost US equity index fund (e.g. "S&P 500") with an expense ratio of 0.30% or less. If you can, great! You do not have a crappy plan.
To be clear, this is not a tall order: Vanguard charges 0.04% for its Vanguard 500 fund, so 0.30% leaves a lot of room!
If you can’t find that, look for a "US large capitalization stock" mutual fund, meaning the fund owns stock in large US companies (think Apple, Verizon, Exxon, etc.). If the expense ratio is <0.50%, then it's probably worth it to contribute.
If the expense ratios is 0.90% or higher, it’s a “crappy plan”.
It might still make sense to contribute, but you should also consider other options.
Between 0.50-0.90%, it still qualifies as “crappy”, but it’s less egregious.
So You Have A Crappy Plan…What Now?
Having a crappy retirement plan is disappointing (and, by the way, something your employer can and should fix).
Now you have to ask yourself if it makes sense to contribute.
Here are the questions you need to ask yourself, before you decide if you still want to contribute to the unmatched portion of your retirement plan (vs. saving your money in an IRA and – if you can contribute more than the annual IRA limit – a brokerage account):
- Are you eligible to contribute to a Roth IRA? If so, a Roth IRA (where you can control the investment choices) might be a more attractive option than the unmatched portion of your workplace retirement plan. If not, the analysis is a bit more complex, but the odds are good you'll still want to contribute.
- What are the odds you’ll still be working at your current employer in 5 years? 10 years? If you think it’s highly unlikely you’ll stick around for more than 5 years (even 10 years), just go ahead and make the contributions. But rolling that workplace plan into either an IRA or your new employer’s plan (assuming they offer a good one) should be a top priority whenever you leave.
- Does your plan allow in-service rollovers? You need to understand the details of your employer's plan, but some of them allow you to rollover even when you're still working there...so if you can get the tax-advantaged contribution and not have to stick around in the bad plan for very long, that can be a great option.
- Are you in a position at work to affect a change in the crappy plan? Your employer could offer something different and better. But only you can assess if it’s feasible and worth your “political capital” at work to try to affect change.
- What are the odds you'll apply for financial aid for your kids / future kids? Financial aid calculations exclude retirement accounts, so if you think there’s a good chance your family will apply for financial aid, getting as many assets as possible into a retirement plan is a good idea.
If any of those points resonate with you, it probably still makes sense to contribute to the unmatched portion of your crappy plan.
** Not sure if your retirement plan at work is any good? We'd love to hear from you!