The Outdated 401(k)

Money Trends

Is your retirement plan entirely wrapped up in your 401(k)? If so, you might want to rethink your personal finance strategy. 401(k) funds were initially designed to create employer-provided, tax-advantaged complements to existing investment portfolios. Over the years, 401(k) funds have become both outdated and expensive.

The Cost of a 401(k)

The initial goal of a 401(k) was quite noble: to create incentives for a business to provide its employees with an addition to their retirement portfolio and certain benefits. The 401(k) fund was never intended to substitute for a comprehensive retirement account.

However, the 401(k) operates on an outdated model. Many companies have transferred the cost of a 401(k) to the employee, making a 401(k) unnecessarily expensive. The cost transfer to the employee also means that companies usually have very little impetus to provide a less costly plan.

A 401(k) plan is often a “set-and-forget” retirement strategy, leading many employees to forget about risk management and other critical essentials. Ultimately, a 401(k) plan becomes less of a retirement investment and more of just an expensive savings account.

A False Sense of Security

Perhaps the most problematic issue with the 401(k) is that it gives employees a false sense of security; they wrongly assume that if they are regularly contributing to their 401(k), they will have their retirement plan mapped out. This inaccuracy allows someone to “save for retirement” without truly understanding their investments or how to maximize their profits, and it can then lead to misunderstandings regarding risk.

As an “easy button” for retirement, a 401(k) may cost individuals the chance to diversify their portfolios and to invest wisely.

401(k)s being tied to corporations can also give an employee a lack of control over their retirement funds.

Ideally, everyone should not only be saving for their retirement but also should understand the basics of investment strategy. If you want to learn more about some modern methods of retirement savings, contact us today at FMT Advisory. We have all of the information you need to make educated portfolio decisions.