Should a 401(k) Be Your Only Plan for Retirement?

Typical 401(k)s are limited to traditional investments that are at the mercy of market swings. If the market is down, so is your retirement fund.

It can certainly be argued that you shouldn't contribute to a 401(k) at all, but lets take a more conservative approach and argue that it shouldn't be your only plan for retirement. It may not be a bad idea to contribute up to the amount your employer will match (because its free money) to your 401(k), but nothing more. After that, investing a portion of your retirement funds in alternative assets may prove to be a wise decision. Read on to to discover why.


A majority of 401(k) plans only allow you to invest in mutual funds, bond funds and sometimes index funds. In most cases, you will choose how to allocate your 401(k) contributions from limited list of funds, provided by the 401(k) provider.

You will likely not have the option to pick individual stocks, move to cash, or invest in alternative investments like real estate. Because of that, you are at the mercy of market swings and when the financial markets are performing poorly (like in 2008), you will see the value of your 401(k) decline. That could be a nightmare if the market is down at the time you plan to retire and your only retirement plan is a 401(k).

401(k) Fees

401(k) plans have fees associated with them including administration fees, investment fees, individual service fees, and sometimes, hidden fees.

Administration fees are paid to the plan provider to handle the day-to-day operations. These fees include accounting, legal, trust service expenses, and other costs incurred in the operation of the plan.

Investment fees are paid on each fund that you are investing. These funds will have an expense ratio that are sometimes up to 2% annually. That means if the fund returns 8%, you are only getting a 6% return. Why pay these guys that much anyway?, most can't even beat a S&P 500 index fund.

There can also be individual service fees and hidden fees associated with your 401(k) plan.

Now to be honest, unless you are actively managing your own retirement funds, there will almost always be fees involved. Its just sometimes, the returns on 401(k)s may not justify the fees charged, and over time it compounds.

What are the other options?

Traditional and Roth IRA's provide more flexibility in your investing strategy. Many IRA custodians will allow you to invest in individual stocks, bonds, and a much wider array of mutual and index funds than you would find in a 401(k). 

Self-Directed IRA's allow you to invest in almost anything. There are very few things you cannot invest in, one of the most notable items being collectibles (art, coins, stamps, etc). You can invest in real estate partnerships, mortgage deeds, precious metals, private companies, energy, promissory notes (loans), and a lot more.

The Bottom Line

401(k)s only allow you to invest in a limited selection of funds and can sometimes carry excessive fees. Even if you invest all your 401(k) assets into a low cost index fund like the S&P 500, you are still exposing yourself to market risk. If the market tanks, so does your 401(k), and that can sometimes postpone your retirement.

That's why, its wise to use IRAs to diversify your retirement funds outside of the mainstream markets and into alternative investments, such as real estate, precious metals, privately held companies, etc.

Babylon Property Group can assist those looking to diversify their portfolio by investing in real estate through Self-Directed IRAs and other sources of capital. For more information please contact us at or by phone at (631) 253-1609