Access to a 401(k) plan isn’t always guaranteed. Not all employers offer these plans, and even if they do, eligibility isn’t immediate. But for those who have the privilege of participating in a 401(k), it can be a lucrative opportunity, given the potential for employer-matched contributions — essentially free money for retirement.
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Despite the benefits, recent data from Bank of America reveals that only 7.7% of 401(k) participants maxed out their contributions in 2023. This prompts a vital question: should individuals consider contributing beyond the employer match to reach the maximum limit?
Considering Better Savings Options
To maximize a 401(k) plan in 2024, individuals under 50 years old need to contribute $23,000, while those aged 50 or older must contribute $30,500. It’s important to note that employer-matched funds do not count towards these limits. Consequently, should an individual, say 30 years old, have a $3,000 employer match awaiting them, their 401(k) could be funded to the tune of $26,000 this year.
While it’s prudent to contribute enough to claim the employer match, considering other options such as an IRA or a taxable brokerage account for additional retirement savings may be worth exploring. The rationale behind this is that 401(k)s often limit investment choices, resulting in higher fees and potentially unsatisfactory portfolios.
For individuals who prefer a hands-off approach to investing, the investment choices within a 401(k) may suffice, especially with the prevalence of target date funds. Conversely, those with a penchant for stock-picking may find more control over their investments by channeling funds into an IRA or taxable investment account, rather than maxing out their 401(k). Additionally, 401(k) plans are notorious for imposing hefty administrative fees that eat into returns, while an IRA could offer lower fees and more control over investments.
Challenging Assumptions About 401(k)s
The low percentage of individuals maxing out their 401(k)s in 2023 may be attributed to financial constraints. However, for those capable of saving well beyond their employer match, maximizing their 401(k) may not necessarily be the most prudent choice. Instead, exploring alternative accounts with lower fees and greater alignment with financial goals could be a more judicious approach.
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