When not to invest in a 401(k)

by Jay Pestrichelli on August 6th, 2013


I saw an interesting article worth commenting on from MarketWatch.com yesterday titled 5 reason not to contribute to your 401(k).  Click here to read.
 
When first reading the title, I thought to myself, this is just a shocking way to grab reader’s attention. But author Cliff Goldstein actually does a nice job of reflecting some of the things we tell our clients all the time.  I suggest reading the article and then coming back for our comments plus  a 6th reason at the end.
 
The reasons are as follows:
1-You don’t have an emergency fund
Buy and Hedge comment: This same rationale also applies to traditional or Roth IRA. No one wants to dig into retirement money for day-to-day living expenses as it comes with a penalty when you withdraw early.
 
2-Your employer doesn’t match contributions
Buy and Hedge comment: An employer match is the EASIEST money you’ll ever make investing. Always contribute enough to maximize the employer match. It may be a 100% or even a 50% match, but either way you should take what they are giving by contributing up to their level. When there’s no match, there are usually many better ways to put your cash to work (see reason 5).
 
3-You’re swimming in debt
Buy and Hedge comment:  There is good debt and bad debt. Carrying bad debt like a credit card with an 18% interest rate is just way too hard to overcome through investing. Pay those off before putting any money into your retirement. Good debt like a mortgage (especially at today’s rates) is fine to carry and still contribute to your 401(k)
 
4-You fear future tax increases
Buy and Hedge comment: Not sure we agree with this one. Letting money grow in a tax deferred way is almost always preferred even if there is a higher tax rate at the time of withdrawal. There would have to be some pretty steep changes to use this rationale as to why not to invest in a 401(k).
 
5-Lack of flexibility and high fees
Buy and Hedge comment: Now this one, we couldn’t agree with more. 401(k)’s are notorious for restrictions on what investment vehicles can be used. Most programs only offer mutual funds, and we’re not the biggest fans of mutual funds.  Most under-perform the markets in general and come with an embedded price tag / management fee. Some programs have made it into the modern day era of investing and offer low cost ETFs, but I’ve yet to hear of one that allows you to hedge. A 401(k) is like any other investment and it should be hedged.  You all know how we feel about hedging, don’t you?
 
6-You don’t have health insurance– A Buy and Hedge addition to the list
I added this one because it’s one of the first questions we ask our clients before they invest with us. One of the biggest expenses anyone can incur is an unexpected health emergency.  Not many things can destroy an investing portfolio as fast a $200,000 hospital bill, so be sure to have that under control first. Not to mention you’re going to get a tax penalty courtesy of Obama care if you’re not insured.



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