Written by Lisa Whitley

If you are participating in a workplace retirement program — 401(k), 403(b) or similar — good on you! And if your employer is matching your contributions, that is even more fantastic. However, employees who do not receive an employer match have an interesting dilemma…are they better off saving for retirement in an IRA rather than use the company plan?

There are two fairly straightforward reasons why you would stick with the company:

One, if you intend to save more than the $6,000 IRA annual contribution limit ($7,000 if you are at least 50 years old). That’s a great reason; you can put away up to $19,500 annually in an employer program ($26,000 if you are 50+).

A second reason is simply the ease and discipline of having the deduction come out of your paycheck.

What if you have contributed to your employer plan up to the match, and now want to go further? Do you put those extra dollars in your 401(k), or do you direct them to an IRA account? One reason why you might choose to do so would be if you were seeking an investment option not available with your employer, such as a Roth account. Another reason would be if the fees charged by your 401(k) plan were higher than what you could achieve elsewhere.

And that is where things get a bit complex…

The two main kinds of fees that you will experience as a 401(k) investor are plan administration fees and investment fees. Plan administration fees cover the cost of the day-to-day operation of the plan…sending out statements, executing transactions, etc. Every plan has them and unfortunately, they are generally higher for small employers. Because of the different ways that these costs are passed on to the employee, it may not be immediately obvious to you what you are paying for plan administration fees.

The more pernicious fee is the investment fee. This is the cost passed on to you of managing the investments in the portfolio that you have chosen. You probably already know this, but it bears repeating: an actively managed mutual fund will charge much, much higher fees than an index mutual fund or exchange-traded fund (ETF). Does your workplace retirement plan offer low-cost index mutual fund or ETF options?

How high a fee is too high? A typical passively-managed index mutual fund will have an “expense ratio” of just 0.2%. If your retirement plan is charging you 1%, that means that your 7% return on investment is actually only 6%. In dollars and cents, $25,000 invested over 30 years could be $179,919…or just $143,587.

So what’s the bottom line?

Read the Summary Plan Description that you received when you joined your employer’s plan. Pay attention to all of the fees described, but especially to the investment fees for the funds you have selected. If there is a lower cost option that suits your needs within the plan, that may be your solution. If not, this could be a signal to you to use an IRA for at least a portion of your retirement savings. And for a deep dive, check out the US Department of Labor’s excellent “A Look at 401(k) Fees” pamphlet here.

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