7 Pros and Cons of Investing in a 401k Retirement Plan at Work

Money Girl explains 7 major pros and cons of having a 401k through your job, and gives you tips on how to save quickly - so you have plenty of security when you’re ready to kick back and enjoy retirement.

Laura Adams, MBA
7-minute read
Episode #385
Your 401k: 7 Pros and Cons of Investing in a Retirement Plan at Work

401k Pro #4: Free Financial Advice

If your 401k provider offers a free consultation with a financial advisor, take advantage of the opportunity to get customized advice and ask questions about your investment choices.

After you enroll in a 401k retirement plan, you’ll need to choose how to invest your money from a menu of options.

Most plan providers are major brokerages—such as Fidelity, Vanguard, and Merrill Lynch—that have terrific resources, such as an online assessment, to help you figure out the best investments for your situation.

They can recommend a diversified combination of funds based on your age and risk tolerance. In general, the more time you have until retirement, or the higher your risk tolerance, the more stock funds you should own. Likewise, having less time or a low risk tolerance means you should own a higher percentage of bond funds or money market funds.

If your 401k provider offers a free consultation with a financial advisor, take advantage of the opportunity to get customized advice and ask questions about your investment choices.

See also: How to Make Money Investing in Stocks

Cons of Investing in a 401k Retirement Plan at Work

While the advantages of a investing in a 401k retirement plan at work outweigh the disadvantages, here are 3 cons to consider:

401k Con #1: Limited Investment Options

When compared to other retirement accounts (such as an IRA) or a typical taxable brokerage account, you’ll probably find that your 401k has fewer investment options.

That means if you’re looking for exotic investment choices outside of the basic asset classes of stocks, bonds, and cash, you’ll come up short. However, having a limited menu does streamline your investment decision and minimize complexity.

401k Con #2: Account Fees

Due to the administrative responsibilities required by 401k plans, they’re relatively expensive to run. Most plan participants have little control over the quality of services they receive, which influences the fees you ultimately pay.

To keep your account fees as low as possible, choose low-cost index funds or exchange-traded funds (ETFs) when possible.

401k Con #3: Early Withdrawal Fees

One of the inherent disadvantages of putting money in a retirement account is that you’re typically penalized for taking an early withdrawal before reaching age 59½.

In most cases, you can take money out of your 401k only if you have a financial hardship. Even then, you’re required to pay a 10% penalty. This discourages participants from tapping their accounts, and makes it easier to keep your retirement funds growing.

More Money Resources 

Investment Tips: How and Where to Invest (the Easy Way!)

Financial Planning Success in 3 Simple Steps

The Rules for Using a Spousal IRA

How to Open a Rollover IRA (Video)

Get More Money Girl!

Want to know the best financial and productivity tools to save time and money? Click here to check out 25+ tools I recommend!

To connect on social media, you’ll find Money Girl on FacebookTwitter, Pinterest, and Google+, and you can email me at money@quickanddirtytips.com. Click here to sign up for the free Money Girl Newsletter!

Also, if you’re not already subscribed to the Money Girl podcast on iTunes or on the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. There’s a huge archive of past articles and podcasts if you type in what you want to learn about in the search bar at the top of the page.    

Download FREE chapters of Money Girl’s Smart Moves to Grow Rich

To learn about how to get out of debt, save money, and build wealth, get a copy of my award-winning book Money Girl’s Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don’t. It’s available at your favorite bookstore as a paperback or e-book. Click here to download 2 FREE book chapters now!

401l Planning image courtesy of Shutterstock and Canva.


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

The Quick and Dirty Tips Privacy Notice has been updated to explain how we use cookies, which you accept by continuing to use this website. To withdraw your consent, see Your Choices.