Retirees may not have all their needs covered by 401(k)s

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) allows someone to save for retirement, invest savings, and defer taxes on the funds invested until after retirement when they will be in a lower tax bracket.

To make contributions to the fund, an investor opts to have a portion of his or her paycheck paid directly into the 401k account. Many employers offer the additional benefit of matching an employee’s contributions by depositing additional money or by making profit-sharing contributions to 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:

1. 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 companies are more efficient because of competition, that doesn’t mean account holders will benefit.
2. 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. For example, a company may offer a great large-cap stock fund option but a mediocre small-cap one. From a recent article on Yahoo! Finance, research director for Morningstar Russel Kinnel said, “If you see some lousy funds from the company that’s providing the plan, that’s probably why.”
3. “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. Each 401(k) account allocates assets according to the account holder’s expected retirement date and becomes more conservative as the date nears. 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.”
4. Account holders who quit their jobs may have to pay to keep their 401(k) at the former-employer company. A Hewitt study showed that 32% of people who quit their jobs ended up leaving their 401(k) accounts with their old employers. Leaving the account where it is may seem like an easier option than filing the intensive paperwork required for a transfer, but the hidden costs of doing so can be overwhelming.
5. Roth IRAs may be more beneficial than 401(k) plans, although 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. Of plans offered by employers, only 5% are Roth IRAs. The Roth IRA isn’t for everyone, but it can substantially benefit certain categories of employees.

Other savings may create more wealth

Other kinds of savings may create more wealth than retirement accounts. The 401(k) is a work in progress, and lawmakers are scrutinizing procedures and fees. Until rules are squared away, other savings ventures can 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.”

Strengths of 401(k) accounts to be tested

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 may need to rely on family help, personal loans or other types of savings to make it through retirement.

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