How should I manage my own investments along with my simplified employee pension (SEP)?
This summer I interned at a firm that offered a 3 percent match on a simplified employee pension (SEP). I will begin working there full-time in August 2019. I am currently enrolled in school and I am wondering if I should open a Roth IRA now and, once I start working, contribute to the Roth and match the 3 percent? Or, instead of opening the Roth, should my focus be on mutual funds and match the 3 percent once I start?
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When investing, you will want to manage your investments in both your SEP and Roth IRA as one whole portfolio and not as separate entities. This means making sure you are not invested too heavily in a single asset class because of unplanned overlap between your Roth and your SEP. You have the basics of getting the 3% match on the Simplified Employee Pension (SEP) no matter what, so you are off to a good start. Regarding whether to also contribute to a Roth or focus entirely on the SEP, several considerations will help make that decision.
Before we get into those, I want to clarify one minor detail. You asked if you should focus on mutual funds instead of a Roth. You should be invested primarily in mutual funds and exchange-traded funds ETFs within your Roth, so there is no need to choose between these two. Roth IRAs, SEPs, 401(k)s, and other retirement accounts are merely accounts. You don't invest IN these accounts; you invest THROUGH them. So regardless of the account, you should be investing IN mutual funds and ETFs through your accounts. I say this because it is essential that you know you can invest in (almost) anything you want through your Roth IRA, and you don't have to open a separate account to invest in funds. If an advisor/broker is telling you otherwise, look for a different advisor.
Now for the considerations for contributing to your Roth IRA or focusing on the SEP.
Start by considering your tax situation both now and in the future. If you assume your income will be higher during retirement (withdrawing from your retirement accounts) than it will be when you graduate, then contributing to the Roth will be appealing. Unless you are jumping into a six-figure salary, you will likely earn more in your retirement than you do during your first decade out of college. If the SEP has a Roth option built into it, you might get the same tax opportunities with just the SEP.
Next, consider the costs for the SEP account. Workplace retirement plans have historically had very high fees compared to what you can get, even from a financial advisor who charges you to manage your portfolio. I have seen workplace retirement plans with 3% all-in fees, including 2% annual advisory fees on top of the fund expense ratios and account recordkeeping fees. You might be able to get lower fees and expenses from your Roth IRA, even if you are paying an advisor to help you with your portfolio. You will want to carefully read the fees in the disclosures you got for your SEP plan to help you understand all the fees they charge.
Finally, consider the investment options within the SEP. If you are too limited in your investment choices or have high expense ratios, you might be better off contributing to the Roth rather than focusing on the SEP.
No matter what, though, contribute enough to the SEP to get the 3% match. Nothing beats free money.