Should you fund your 401(k) after the employer match or move it to an IRA?

One of the benefits of saving for retirement in a 401(k) is that you can potentially access the money in that account deposited by your employer. Across retirement plans, Vanguard reports that 95% of employers contribute in some way to their employees’ 401(k)s.

If you qualify for an employer match in your 401(k) plan, you may want to do what you can to secure all of the free money. So if your employer matches 100% of your contributions up to $3,000, the minimum you need to put in your account is — you guessed it — $3,000.

But what should you do after you’ve finished playing? Would it be helpful to continue funding my 401(k)? Or is it better to use an IRA?

The question is what your 401(k) has to offer.

An IRA has major advantages over a 401(k). An IRA typically allows you to invest your retirement funds in individual stocks. 401(k)s, on the other hand, are typically limited to a variety of funds, such as mutual funds or index funds.

There are two reasons why limiting funds is problematic. First, if you invest your money in a specific fund, you do not have complete control over your investment. Additionally, certain funds (especially mutual funds and target date funds, which are popular in 401(k)s) are notorious for charging high fees. So sticking with a 401(k) that isn’t matched by your employer could mean having to invest in ways that aren’t right for you and that cost you more in the form of higher fees.

If you think about it, there are also convenient elements.

Smart investors can choose stocks individually by opening an IRA with a stockbroker for long-term savings. But anyone who doesn’t want to do that may find that the choices offered by 401(k) plans are perfectly suitable.

It’s very common to find index funds as an investment option in a 401(k). And because index funds are passively managed (unlike mutual funds, which employ actual people to select investments), their fees tend to be fairly low.

Additionally, purchasing a broad market index fund, such as an S&P 500 index fund, is a great way to immediately diversify your portfolio. For individual stocks, you should make an effort to select companies across a variety of industries. Therefore, building a portfolio for your IRA may require time and effort that you don’t really have.

So even if you’re fully matched with your employer, you may find that a 401(k) is a good place to save for retirement. And you’ll find that keeping all your savings in the same place makes it easier to track your progress and assets. So unless you’re losing a ton of money in fees, and you don’t mind being a more hands-off investor, it’s not a bad idea to stick to just a 401(k).

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