Detailing My Company’s 401k Plan and Why I Don’t Participate

I have been at my current company for two years now and have yet to participate in my company’s 401k plan. First and foremost, my company doesn’t match at all. If my company matched, I would be deferring the minimum amount necessary to receive the full match. Passing up on any portion of a company’s 401k match is the same thing as passing up free money.

Second, I didn’t have a strong need to reduce my taxable income as I will probably be in a higher tax bracket when I retire. Additionally, taxes will most likely increase in the long-term future. For these reasons, I decided to open a Roth IRA to contribute after tax dollars towards my retirement savings.

Third, I decided I really wanted to purchase a condo when my apartment lease ended. In order to meet my 20% down payment goal, I had to put all of my savings towards this down payment and would not be able to fully fund my 401k anyways. Additionally, I had to take on a second job, which resulted in self-employed income.

Fourth, in order to avoid as much double taxation as possible, it is more beneficial for me to invest in a solo 401k instead of my company’s 401k. Also, in a solo 401k I get to chose who my administrator is and what funds I invest in, which is important for my final reason to not participate in my company’s 401k.

Finally, I am not overly excited about the funds available in my company’s 401k, which is provided through ING. In the following table I have broken down the available funds, the category of the fund and the expenses of the fund.

As you can see, the expenses are much higher than what I consider acceptable. I am a huge supporter of index fund investing, which typically have expense ratios of around 0.20%. If my company did offer a match I would be able to mix and match with these funds to create an acceptable asset allocation. I would invest in some combination of the Vanguard Large Cap Value fund, ING Intermediate Bond Fund, Ariel Small Cap Value Fund and Fidelity VIP Overseas Portfolio.

The 401k also offers the equivalent of a life cycle retirement fund. The following table outlines the ING investment solution portfolios available in the 401k.

These life cycle retirement funds come with expense ratios greater than what I consider acceptable. Additionally, the stability of principal category is introduced too early for my risk preference. Also, the percent of bonds and stability of principal in the latter stages of the life cycle is too large.

All of these reasons mentioned above combine to make it an easy decision for me to avoid participating in my company’s 401k. I’ll take my chances with my Roth IRA and soon to be opened solo 401k.