Should I match my employer contribution to my retirement account or invest elsewhere?
I often hear to match your employers contribution to your retirement plan and that makes sense to me if there is "free" money on the table. However, in my case, my employer makes an annual contribution of 7.25 percent of my salary to my retirement account regardless of my contributions. So if I contribute nothing, I still get the 7.25 percent contribution from my employer. Currently I do make an additional 8 percent contribution to the plan and I would like to increase it, but I was wondering if that money would be better invested as a separate strategy rather than just more in my target date retirement plan? I have no debt other than my home, several months of savings in available cash, and approximately $15,000 in laddered CDs.
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You are correct, the rule of thumb advice doesn't really apply to you. If it is better you don't invest in the 401(k), the alternative to look at would be opening your own Individual Retirement Arrangement (IRA) account. To determine whether to invest in your 401(k) or to invest in your own IRA, ask yourself the following questions (more detail below):
Does the 401(k) have a ROTH Option?
How attractive is the 401(k)?
Do you have a heightened risk of lawsuit or bankruptcy?
To help answer the questions, contact your HR department and ask for the 401(k) Summary Plan Description, which will have the information you need to analyze the plan. If you want help with the decision, contact a fiduciary & fee-only financial planner. Be wary of financial advisers who sell products on commission or who are not legally under the fiduciary standard.
Do you have a ROTH option in the 401(k)?
Tax diversification in retirement accounts is a major advantage, and your employer contribution is always tax deferred money. So if your 401(k) doesn't have a ROTH option, this would be a major consideration for opening and contributing the max you can to a ROTH IRA rather than continuing to contribute to the 401(k). There are a series of rules for how much you are allowed to contribute, but even if you make too much money to use a ROTH there is also the back-door ROTH strategy.
How attractive is the 401(k)?
Sadly, many 401(k) plans are saddled with high fees, poor investment choices, and other unattractive features. If this is the case for your employer plan, contributing to an IRA could both save you money and give you better investment options. [In fact, it's not uncommon for someone to hire their own personal financial adviser and the fees are still less than the fees in their company 401(k) plan.] On the other hand, if you have an attractive 401(k) plan with low fees and good investment options, then investing there makes sense.
Are you subject to a heightened risk of lawsuit?
The final consideration is whether you are subject to a high risk of lawsuit due to your profession or other factors. If your risk of lawsuit is abnormally high, you should carefully consider saving everything into the 401(k) plan. 401(k)s have the strongest federal protection against lawsuits or creditors and money is even shielded from bankruptcy. IRAs, on the other hand, have much weaker protections which vary from state to state. For the average person the difference is irrelevant, but for some this additional protection can be very important.