What if you could choose the trustee for your 401(k) plan? In most cases, you can’t, but if you could, we would recommend the five platforms below as the best 401(k) investment accounts available.
We’ve also included two tools to help you manage your 401(k)—blooom and Empower.
But before we get into the best 401(k) investment accounts, let’s first take a look at the basics of what 401(k) accounts are.
What is a 401(k) Plan?
A 401(k) plan is an employer-sponsored retirement plan. The employer sets up a plan through an administrator, who actually manages it. But the plan is held by a trustee, which could be a large brokerage firm, a mutual fund family, or even a robo-advisor.
You, as an employee, make contributions to the plan out of your salary. Your employer may—but is not required to—make matching contributions.
Any contributions you make to the plan, as well as the investment earnings on those contributions, are immediately vested. That means the funds belong to you, even if you terminate your employment. Employer matching funds are generally subject to vesting requirements. Typically, you have to remain with the employer for up to six years to be fully vested in the employer contributions.
Your contributions to a 401(k) plan are tax-deductible, and there are no tax consequences resulting from the employer match. Meanwhile, investment earnings within the plan are tax deferred, which means you pay no tax on those earnings until you begin taking withdrawals.
You are eligible to begin taking distributions from your 401(k) plan once you reach age 59 ½. As you receive those distributions, they are taxable to you as ordinary income. They’re subject to federal income tax, and generally state income tax as well if your state has one. However, since they are not considered earned income, they’re not subject to FICA tax.
The difference between an IRA and a 401(k)
IRAs and 401(k)s are both investment accounts, but they have significant differences. The major difference is the contribution limits.
The limit for annual 401(k) contributions (for 2023) is $22,500 for those under 50. Those 50 and older can contribute an additional $7,500 per year. For IRAs, the maximum annual contribution is $6,500 (for 2023) for those under 50. Those 50 and up can contribute an additional $1,000 for a total of $7,500 per year. Anyone who Individuals earns more than $153,000 per year (or $228,000 for couples) are ineligible to contribute to a Roth IRA.
For a comprehensive list of differences, here’s a handy table:
|Contributions limits||$6,500, plus a $1,000 “catch-up contribution” if you’re 50 or older. Total, $7,500.||$22,500, plus a $7,500 catch up contribution if you’re 50 or older. Total, $30,000.|
|Income limits for contribution eligibility||Married filing jointly up to an income of $228,000; Single, head of household, or married filing separately allowed up to an income of $153,000.||No income limits for most situations.|
|Tax deductibility of contributions||Not tax-deductible.||Tax-deductible.|
|Employer matching contribution||None available.||Depends on the employer, commonly an employer may match between 50 percent and 100 percent of the employee’s contribution.|
|Tax treatment in retirement||Distributions can be withdrawn tax-free.||Both your contributions and investment earnings are only tax-deferred. You pay income tax when you withdraw.|
|Early withdrawals||Contributions can be withdrawn at any time, tax-free and penalty free. Investment income earned subject to income tax and the 10 percent early withdrawal penalty if taken before age 59 ½.||10 percent penalty.|
|Loan provision||None.||Can borrow up to 50 percent of the vested value of your plan, up to a maximum of $50,000. Repayment must typically be accomplished within five years.|
|Investment options||Self-directed.||Restricted to the investment selected by your employer.|
|Required Minimum Distributions (RMDs)||Not subject to RMD's.||Fully subject to RMD’s|
The best 401(k) plans
What separates the best 401(k) investment plans from the rest? There are many factors, but the three that will make the most difference to you as the employee investor are:
- A wide variety oft investment choices (funds) to choose from based upon your individual retirement goals.
- Low fund expenses.
- The option to make all or a portion of your contributions to a Roth 401(k) account, which can reduce your taxes in retirement.
- A generous employer match.
While the employer match features is up to your employer, the other factors are a function of the 401(k) administrator your employer uses. Plan administrators include large investment companies like Fidelity and Vanguard, payroll companies like ADP and Paycheck, and hundreds of others.
According to Employee Benefit Advisor, an industry newsletter, these 25 companies offer the best 401(k) plans in America. Not surprisingly, all are very large companies. That’s because 401(k) plans are quite expensive for employers to administer (whether the plan covers 10 employees or 100,000). In general, however, an employers per-employee 401(k) admin cost will go down the more employees participate and contribute. As a result, the largest employers can offer better plans through economies of scale.
Here’s the list:
- General Motors
- Hospital Corporation of America (HCA)
- Johnson & Johnson
- Fidelity Investments
- United Technologies
- Northrop Grumman
- Bank of America
- JPMorgan Cjase
- Lockheed Martin
- Wells Fargo
Although there are pros and cons to working for very large employers, good benefits are typically one of the pros. This list confirms that, at least as retirement plans go.
While a good 401(k) plan still isn’t as attractive as the pensions of yore (in which your employer guaranteed an annual benefit in your retirement), the value of participating in one of the best 401(k) plans can add up to tens of thousands of dollars toward your retirement over the course of your career.
How to evaluate your 401(k)
It’s fairly easy to look at your 401(k) plan and tell if it’s one of the best. Here are the factors I recommend you evaluate in your plan.
Investment choices and fees
The best 401(k) plans offer a variety of mutual funds. When you open an IRA or another self-directed investment account, you invest your money in that account any way you want.
You have an entire universe of investment options at your disposal: Actively managed mutual funds, index funds and ETFs, target-date funds, or even individual stocks and bonds.
In a 401(k) plan, you’re must more limited in how you can invest the funds you contribute. Some plans, for example, might only offer a dozen or so mutual funds to choose from.
The lack of choice in 401(k) plans is partly to help simplify the investing process for employees. In other words, they don’t want to overwhelm you. That can be a good thing, as long as the available investments are good ones.
Too often, however, 401(k) plans are full of mediocre actively managed mutual funds that may underperform the overall market and charge you more than necessary to boot!
The best 401(k) plans should offer:
At the very least, you should be able to invest in low-cost index funds such as a total stock market fund, S&P 500 index fund, or similar. More and more studies are showing that such simple funds, which track entire sectors of the market rather than trying to pick winning stocks, do just as well or better over the long-run and save you a lot of money in the process.
Low-cost target date mutual funds
For hands-off investors, target date funds are the way to go. The funds automatically rebalance themselves based upon your projected retirement date, so you can invest once and never worry about changing your investment selection again. These tend to be actively managed funds, so expenses will be higher than index funds, but that doesn’t mean you have to pay and arm and a leg.
According to a study by planadvisor, the average target date fund charged a 0.53 percent expense ratio in 2015. I think that’s a fair benchmark. Fees approaching 1 percent is expensive for a target-date fund. Anything over 1 percent is a rip-off. If anything, fees should be going down with increased competition in the space.
The option to make Roth 401(k) contributions
As with IRAs, the tax code allows you to make two different types of contributions to 401(k) plans: Traditional contributions are made with pre-tax dollars but will be taxable when you make withdrawals in retirement. In other words, you defer taxes until retirement.
On the other hand, contributions you make to a Roth 401(k) are not tax-deductible, but grow tax free and can be withdrawn tax-free in retirement. Thought it may seem like an even trade—you either pay taxes now on money you contribute to a Roth 401k(k) or pay taxes later on money you contribute to a traditional 401(k), most experts agree that you’ll end up with more money in retirement by using Roth accounts. This is especially true if you’re young and have a long time to let them money grow tax-free.
Access to financial advice
A good 401(k) plan should have a number you can call for investment help, or even a representative dedicated to your employer’s account with whom you can discuss your investment options.
Low overall fees
Finally, and perhaps most importantly, the best 401(k) plans charge below-average fees. Although investment returns are unpredictable, fees are a constant drag on your potential returns.
For example, let’s say there are two stock mutual funds that are identical expect for the fact that one charges 1.25 percent and the other just 0.25 percent.
Let’s say you invest $10,000 in both funds and don’t touch it for 30 years. Both funds return 7 percent a year. Paying the 1.25 percent fee, you’ll end up with about $371,000. But with the lower 0.25 percent fee, you’ll have closer to $502,000. That’s $131,000 more in your pocket. And that’s just on a one-time $10,000 investment. Imagine how the additional fees add up if you’re making additional contributions every year.
When it comes to fees, lower is almost always better. Unfortunately, 401(k)s tend to have higher investing fees than if you opened an IRA or other account on the open market, where you can score index funds with fees of less than a quarter of a percent. In 401(k) accounts, you may be looking at average fees of around double that (0.50 percent).
You can use this basic 401(k) calculator to estimate your 401(k) balance on retirement, based on your personal financial status:
What you can do if your 401(k) stinks?
If you read this and discover that your 401(k) plan is one of the best, congratulations! You’re one of the lucky ones. Unfortunately, many of you may read this and discover your 401(k) plan leaves a lot to be desired—either because of limited investment choices, high fees, or both.
If your 401(k) isn’t competitive, it’s not the end of the world. You may simply decide to contribute less to your 401(k) and more to an IRA or Roth IRA, where you can make your own investment decisions.
Changing a company’s 401(k) plan isn’t something that happens overnight. That said, if your 401(k) plan is terrible, you might want to discuss it with some coworkers and approach management about researching alternatives.
Without pensions and with dwindling confidence that Social Security will be around forever, the 401(k) is the bedrock of American retirement planning. You deserve the best 401(k) plan you can find. At the very least, you should take steps to make sure you’re using your existing 401(k) in the smartest way possible. That’s where our recommended tools come in, which can help you analyze your 401(k) investments and make changes to minimize fees and optimize potential returns.
In-depth analysis of the best tools to manage your 401(k)
Blooom – Best for investment management assistance
Blooom isn’t an account in the traditional sense, nor is it a robo-advisor. Rather, it’s a 401(k) optimization tool that enables you to better manage your plan. The basic concept is to organize your plan so that your portfolio is properly optimized, with a mix of low fee investments. blooom helps improve your 401(k) performance by minimizing the investment fees, as well as to create a proper asset allocation.
The all starts by performing a free 401(k) analysis. Naturally, blooom will have to work within the scope of the investment funds that are available in your plan. But they’ll eliminate funds that don’t fit within the framework of your long-term goals, as well as emphasize funds with the lowest fees. This part of the service is free to use.
If you sign up for the service, blooom will also make regularly scheduled rebalancing, to make sure you maintain your desired portfolio allocations. It’s one of the few investment apps available that actually works within your 401(k). blooom actually connects with major 401(k) providers, giving it the ability to work within the plan itself.
Reasons to open an account with blooom
- Blooom actually works within your 401(k) plan, as opposed to other services that only make recommendations.
- The fee of $10 per month, or just $120 per year, works out to be less than 0.50 percent on a $25,000 401(k) plan. That makes blooom competitive with robo-advisors. And if you have a larger portfolio, the fee is even more cost effective.
- The initial 401(k) analysis is free, even if you don’t sign up for the service.
The main reason to not go with blooom
If you’re the fully self-directed type of investor, and your 401(k) is held with an investment broker with unlimited investment options, you may not be interested in the service. But you may still want to try the free initial 401(k) analysis.
Who is blooom Best For?
Probably the majority of investors. Most people who have employer-sponsored retirement plans have little investment knowledge. Using a service like blooom will definitely help to improve your long-term investment performance. And that will ensure a more comfortable retirement.
Visit blooom to open an account today and get $15 off your first year of blooom with code SMART15, or read our full blooom interview.
Empower – Best for professional management OR self-directed assistance
Empower doesn’t actually manage your 401(k). But the service does offer a wealth of tools that help you better manage your plan. What’s more, the 401(k) management tools are available free of charge.
Empower comes with two plans. The free plan provides budgeting as well as an entire portfolio of investment management tools. The wealth management plan is the paid version, that provides direct management of taxable accounts and IRAs. But for 401(k) purposes, you can take full advantage of the free version.
The free version offers the following tools:
- Retirement Planner. This tool helps you determine if you are on target with your retirement plan.
- 401(k) Fee Analizer. Much like blooom, this tool analyzes your investment funds, and tells you exactly how much you’re paying for each. You can then make adjustments in your portfolio to minimize your investment fees.
- Asset Allocation Target. This tool analyzes your asset allocation, and determines if you are either overweight or underweight in any of the major asset categories. It will help you to achieve better balance in your retirement portfolio.
Reasons to use Empower
- The free version of Empower is all you’ll need, and it will provide solid investment guidance.
- Investment fees are a major factor when it comes to long-term investment results. If the service can lower your fees by just 0.25 percent per year, it can add many thousands of dollars to your plan over the decades.
- If you have little or no investment experience, Empower can help you with the basics, like asset allocation. It can also let you know if you are on track to meet your retirement goals.
The main reason to not go with Empower
Empower is not a comprehensive 401(k) plan investment management system. It’s more of an assistant in helping you to manage your own plan.
Who is Empower best for?
Anyone who is looking for some form of at least limited 401(k) management help should consider Empower. The service is free to use, and helps you determine your asset allocation, as well as to get a complete handle on the fees your paying in your plan.
(Personal Capital is now Empower)
Visit Empower to open an account today or read our full Empower review.
Q: Can I open a 401(k) and another retirement account?
A: Yes! You can contribute to a 401(k), Roth IRA, traditional IRA, and as many other accounts a you want—in fact, we encourage you to.
But, you should understand the different tax rules associated with each. Tax-deferred accounts include: 401(k)s, 403bs, traditional IRAs, solo 401(k)s, and SEPs. Post-tax accounts include: Roth 401(k)s and Roth IRAs.
Q: How do I open a 401(k)?
A: You may only open a 401(k) at work, assuming your employer offers this benefit. Ask your HR or benefits manager. There’s a special kind of account called a Solo 401(k) for self-employed individuals; here’s how to know if you’re eligible.
Q: How much can I contribute to a 401(k)?
A: For 2018, you can contribute up to $18,500. If you are 50 or older, there is a $6,000 catch-up contribution, raising the maximum the $24,500. However, your contributions cannot exceed your earned income.
Q: What does employer match mean?
A: An employer match is exactly what it sounds like—if you get a 401(k) through your employer—your employer could offer to match a percentage of your contribution.
Q: What are my 401(k) investment options?
A: It all depends on who the investment trustee is, and that’s determined by your employer. You may have full investment availability, if the trustee is Fidelity or Charles Schwab. Or you may be limited to mutual funds, if it’s a fund family like Vanguard.
Q: What fees do I have to pay for a 401(k)?
A: Your employer pays administrative fees to the fund trustee, but that doesn’t mean you’re not charged as well. Every investment within your 401(k) charges fees that can add up to as much as 1 percent or more of the amount you have invested annually. Minimize your fees by researching your chosen investments and finding those that meet your goals for the lowest cost.
Q: What happens if I take early distributions from a 401(k)?
A: Any time you make withdrawals from a 401(k) plan, they are subject to ordinary income tax. But if you take a distribution before turning 59 ½, you also have to pay a 10% early withdrawal penalty. However, the IRS does provide a long list of exceptions to the penalty, though you’ll still have to pay ordinary income tax.
Q: Can I take out a 401(k) loan?
A: You can, but we advise against it! A 401(k) loan is a lump-sum disbursement from funds that you have saved in your retirement account. But, you must repay the loan over a fixed-amount of time—with interest.
If you can’t pay this loan back, you’ll be hit with some serious penalties. The remaining loan balance will be treated as a pre-mature cash withdrawal from your 401(k). So, it’ll be subject to at least a 20 percent federal income tax, state tax, and a 10 percent early withdrawal penalty. That’s a lot to lose.
Now that private pensions are mostly a thing of a past and the future of Social Security benefits is dubious at best, the 401(k) plan is arguably the most important tool for Americans’ retirement.
If you have this benefit at work, you should take advantage of this retirement plan. Most people underestimate the amount of income they’ll receive in retirement, particularly since they’ll probably have multiple income sources.
The high contribution limit of the 401(k) is the perfect way to save a lot for retirement.
Read moreEmpower Personal Wealth, LLC (“EPW”) compensates Webpals Systems S. C LTD for new leads. Webpals Systems S. C LTD is not an investment client of Personal Capital Advisors Corporation or Empower Advisory Group, LLC.
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