Q: I have some back pay for unused sick days coming to me from my employer in a lump sum. I want to put the money toward my retirement, and could either put it in my employer's 401(k) plan or an IRA. Is one likely to cost more in fees than the other?
A: It depends very much on the specific plan and service provider, but generally speaking a 401(k) plan is likely to be more expensive than an IRA. However, a more important issue is whether your employer makes matching contributions to the 401(k) plan. Some employers will match, or at least partially match, some or all of the amount their employees contribute to the 401(k) plan. If you are eligible for this kind of matching contribution, it could very well outweigh any fee differential between a 401(k) plan and an IRA.
If your employer does not make matching contributions, then there might be a couple of advantages to putting your money into an IRA rather than a 401(k). One of these advantages is a broader range of investment options. Depending on which 401(k) platform your employer uses, there may be some limitation to the investment choices available to you. Most plans have a range of options ranging from low-risk to high-risk, but you are limited to the options the plan has chosen to make available. In an IRA, you can use any legitimate investment vehicle, from savings accounts to stocks to commodities.
Another advantage of an IRA may well be a lower fee structure. If you invest in a mutual fund or other managed investment vehicle, you will pay some form of fee, whether it is in a 401(k) or an IRA. On top of that though, 401(k) plans also have record-keeping and administrative fees, which can add another layer of cost.
Still, even if you do your investing via an IRA, be advised that investment fees can vary widely, so look carefully when choosing your investments. That's not to say low-cost is necessarily the best option -- you may well find it worthwhile to pay a little extra for a skilled active manager, but a fee comparison should be one of the factors you consider when choosing how to invest. Also, when looking at mutual fund fees, make sure you check not only the ongoing management fee, but also whether there are any front-end or back-end sales loads.
Keep in mind that there are annual contribution limits to both an IRA and a 401(k) plan. If the lump sum you are going to receive exceeds either of these limits, you may want to put some money in both types of plan to take maximum advantage of the tax deferral.
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