Contributing to a 401(k) Isn’t Always Smart

Contributing to your 401(k) is a great way to save for your retirement. The media often touts that you should save first in your 401(k) up to the match, then maybe a Roth or regular IRA, followed by maxing out your 401(k).

I’d say this is good advice most of the time and that is what the media shoots for. However, there are some unique situations where investing in a 401(k) isn’t one of the best options. Believe it or not, there was a time I didn’t invest in a 401(k) for some of the reasons below!

401(k) Offers No Match or Automatic Contribution

It may make sense to skip investing in a 401(k) if your 401(k) offers no employer match. Why? Normally the greatest benefit of a 401(k) is the matching contribution from your employer. No matter how your contributions are matched (dollar for dollar, 50 cents per dollar, 25 cents per dollar, etc) your match is essentially free money and it likely provides one best returns on any retirement investment you could make.

Without the 401(k) employer match, a 401(k) is just another retirement vehicle like many others. It still offers tax advantages, which are awesome, but there are other restrictions that make the 401(k) not quite as flexible as savings vehicles such as IRAs.

Lack of Flexibility and High Fees

Your 401(k) must be held with the institution picked by your company and can only have investments that are part of the plan. Some of these investments will not be suitable for your particular needs and some unfortunately have high investment fees as well. If you have no employer matching, the inflexibility and fees can easily make the 401(k) a vehicle you want to skip until your other options are maxed out.

In fact, a recent piece by My Journey to Millions points out how outrageous these fees can be. His only cash fund option charges 0.95% ┬áin fees just to hold his investment in cash. CRAZY! Those aren’t the only fees. Make sure you watch out for record keeping, quarterly and other annual fees your 401(k) might charge.

Your Employer Contribution May Be Automatic

My employer contribution at a previous job was automatic and would be placed in my 401(k) regardless of whether I contributed or not! Talk about awesome! If this is the case for you it may make sense to max out your IRA before you contribute a dime of your personal money into your 401(k). If you have better options in your IRA than you do in your 401(k) and this is the case I say go for the IRA!

Your Vesting Schedule is Horrible

The last reason I can think to skip contributing to your 401(k) is if your vesting schedule is absolutely awful and you plan to leave town before you would vest at all. Vesting essentially means that if you left your job today you’d get to keep all or part of the employer contribution to your 401(k).

This reason to skip investing in your 401(k) is a bit trickier as you’d have to know 100% that you’re going to be leaving town before you vest in any of your employer match. If your spouse is in the military it may be the case though. If you end up not leaving when you plan or expect you’d be leaving free money on the table… We don’t want that!

Why I Didn’t Contribute to a 401(k) in the Past

As I mentioned above, my previous employer’s had a 100% automatic contribution to my 401(k) regardless of whether I contributed anything to my 401(k) or not. The 401(k) didn’t have the best investment options so I opted to max out my Roth IRA instead. If I had gotten to the point where my Roth IRA was maxed out I would then contribute to my 401(k) but I ended up changing jobs before that happened.

Have you ever not contributed to a 401(k) for one of the reasons above? How about another legitimate reason?

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.


  1. Good points Lance. I agree, the best part of the 401K is the match. I’m not really sure why an employer would offer one if they didn’t match. Why not simply let employees find an IRA on their own?

    • An IRA can definitely be better than a crappy 401(k), but the limits are much lower for what most people can contribute. The 401(k) opens up a ton more money you can stash away.

  2. Good points Lance. The only way I would contribute to a 401k, without a match, would be if the fees were really low. However, if they do not offer a match the low fees are probably not likely. It amazes me sometimes the crappy 401k’s some employers offer. Why not just go ahead and offer a self-directed 401k then?

  3. My 401k doesn’t have a match and I still contribute a large chunk of my money to it. Why? Simple, I need to lower my taxable income to balance out some of my investment income where I don’t have any tax withholding (I know it is a terrible problem to have /sarcasm). It also helps that my current employers did a great job of offering plenty of choices with fairly low fees. I wouldn’t rate it as an A, but it is a solid B.
    I agree with all your points. The trick for people who choose not to invest in a 401(k) would be that they need to make sure they are still investing and not just using that money to inflate their lifestyle!

    • All good points! I would suggest using an IRA or Roth IRA if you qualify before going to the 401(k) if your 401(k) doesn’t match and stinks! However, if you want to save more than the IRA max, it’d be at that point I say start saving in a nonmatching IRA.

  4. I’ll be honest, I didn’t while I was aggressively paying down debt and then saving for a home. Looking back, I wish I would have at least contributed some. I’ve always had a match. But luckily once I started, I was completely vested, so the timing worked out well.

  5. NOT invest in the 401k?? MMD says Oh, hell no! ………

    Just kidding. You’re points are all totally valid. If I wasn’t getting employer matches, I’d think differently too. My IRA has much better choices and is cheaper. The 401k is just a nice place to get a break on taxes as your investments grow. Plus you can stash away more than an IRA.

    Our vesting schedule is 7 years, which I feel is just an incredibly long time to wait.

  6. Nice points Lance. I think people hear 401k and they get excited and think that they will get money. When my current employer first setup a 401k option, they didn’t have a match. They did provide a really good mix of funds that we could be in, so I liked it. They now match, so it makes it better. Having a 401k is not always the best option.

  7. I never add anything extra into my super account (Australia’s crappy version of the 401K). My reasoning is a little different though – for me I won’t add money into it because the rules are terrible. We can’t touch it until we are 67 years old, and every year they change the rules on how and when you can access it.
    When I first started working the age you could withdraw was 60 and there was pretty much no tax on contributions. Now it is 67 years and it is taxed every which way and they now no longer allow you to draw down more than a set limit each week so you don’t spend it all.

  8. My company doesn’t provide an employer match in my 401K, the plan’s index funds aren’t the best but decent. Despite no match I put in the maximum allowed by the plan, and so does my wife in her 401K. Minimizing taxes, which is our larget expense, is our top priority. Between the retirement accounts, mortgage deduction and misc. write offs our goal is to deduct an entire salary.

    For many PF bloggers who seek to minimize expenses, taxes are often overlooked. Maximizing 401K, Roth IRAs, mortgage write offs, rental property deductions, and 529 plans are tools the middle class can utilize.

  9. I’m gonna come down on the other side of this. The #1 reason why you should save first into your 401k has nothing to do with employer match or fees. It’s the only way that you can get pre-tax money saved (unless you’re below a certain income threshold). Employer match is icing on the cake and unless the fees are more than 25% (the average tax bracket for a person in a 401k plan) you can’t beat the tax savings. Want a free 25% return? Invest in your 401k.

    To get around the fees, see if you can make an “in service withdrawal” to an IRA that you manage yourself. Then you can use low-cost ETFs and still grab that pre-tax 401k status….

    • I haven’t heard of many companies allowing in service withdrawals but I could be wrong there. As far as the 25% return… you do have to pay taxes on it sometime even though it may not be at a 25% rate you’ll likely pay something. I’m only suggesting you consider your options before investing in a bad 401(k). If you have an IRA or other retirement vehicle available you might want to consider that before putting anything into your 401(k) if it sucks.

  10. All great examples of why not to invest in your 401k. I completely agree that some of the options your employers 401k plan offers may not be the best and contributing to an IRA will give you a vast amount of options.

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