401(k)s may not cover all retirees expenses

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Retirees could end up needing personal loans alongside 401(k) funds

Consumers may need personal loans to manage through retirement if they aren’t careful with their 401(k) accounts. A 401(k) account allows a working person to save for retirement, invest the savings and defer taxes until after retirement when, in most cases, the account holder’s income will be subject to a lower income tax rate.

To make contributions to the fund, an investor opts to have a portion of his or her paycheck paid directly into the 401k account. Employers offer the benefit of matching contributions by putting additional funds into the account or profit sharing contributions into the plan. Irrespective of other benefits, the typical 401(k) is simple and effective for employees to put money away for retirement.

Downsides of 401(k) investments

Although the idea is a good one, there are certain things a 401(k) provider doesn’t usually tell its depositors. Here are some of the most important things to know:

Investment companies make big money on 401(k) accounts, even when account holders do not. The number of 401(k) investors has increased dramatically in recent years. According to Cerulli Associates, a research and consulting firm specializing in the financial services industry, that number has risen to 50 million providers. Though the companies are more and more efficient as a result of the increased competition, that doesn’t necessarily mean account holders see the financial benefit.
The 401(k) account rarely offers top funds. The reason for this is simply that asset managers may not have top funds in each category. A company could, for example, offer a large cap stock fund that’s good, but a small cap that isn’t. In a recent Yahoo Finance article, Morningstar research director Russel Kinnel said, “If you see some lousy funds from the company that’s providing the plan, that’s probably why.”
“Target-date funds” may not be accurate. As required by last year’s Pension Protection Act, 401(k) accounts have “target dates” as default options. Every 401(k) allocates assets according to the acocunt holder’s expected date of retirement, and gets more conservative the closer it gets. Research shows that some target-date funds may not earn enough for retirement. Kinnel added, “Retirees may need to supplement funds with personal loans, family help or part-time work to make it through their monthly expenses.”
Account holders who quit their jobs may have to pay to keep their 401(k) at the former-employer company. A Hewitt study purported that 32% of people that quit their jobs left their 401(k) accounts with their previous employer. It might seem easier to leave the account where it is rather than the paperwork required to transfer, but the costs of doing so can be incredible.
Roth IRAs can be more beneficial than 401(k) plans, but few employers offer them. Though traditional 401(k) accounts have features of tax deferment, Roth IRAs are taxed up front rather than at the point of withdrawal. Only about 5% of retirement plans available through employers offer the Roth IRA option. A Roth IRA isn’t for everyone, but it does have benefit some people substantially.

Other savings may create more wealth

Other kinds of savings may create more wealth than retirement accounts. The 401(k) continues to be a work in progress and lawmakers are currently scrutinizing fees and procedures. Until the rules are finally settled, other savings vehicles may offer higher returns. In the same Yahoo Finance article, Brent Glading of the Glading Group said, “For those who are not averse to risk, high-end stocks and bonds can be great investments that offer a bigger return in a shorter amount of time…they aren’t for the faint of heart though. Only serious investors should even try managing them.”

The 401(k) put to the test

The 401k account is a unique savings vehicle that offers a tax-deferred way to save money for retirement. Though many employees don’t rely on the accounts to get them through retirement solely, analysts indicate many account holders aren’t saving enough. They might need to reach out to family for help or personal loans or other savings for retirement.

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