In the past 3 months alone, 401k assets have increased by a total of 1 trillion dollars. Not only has the American market be seeing great increases in these accounts, but the international markets have also been doing well. Now, why is this? What is causing this?
There’s actually a few reasons, but the most evident one is that we now see more and more people entering the workforce that are putting their money into these 401k accounts. This week, Michael and John discuss some key details about 401k and other retirement accounts to help you ensure that you can enjoy your money in retirement.
“We now see more and more people entering the workforce that are putting their money into these 401k accounts”.
Now, one of the first things Michal and John talked about on the show was cost. 401ks are cheaper in investment expenses than IRAs, 30% cheaper in fact. The average cost of a mutual fund held in 401k accounts was significantly lower than those held outside the plan, with the average expense ratio inside the 401k in 2016 being 63 points compared to a half a percent for those held inside. Why are 401k accounts cheaper? Simply put, there is a lot more money in these accounts than would typically be in an individual account.
For example, in 401k plans (especially ones at large companies), there can be billions of dollars inside that plan, and that company can invest that large amount of money at better rates than individual accounts can. However, it is worth considering that if you work at a pretty small company, your 401k account might not have as much nor have access to those same rates.
There are other things you do need to consider as well. For instance, if you leave a company after 55 (and before 59.5) you can take a penalty-free withdraws out of your 401k plan, but if you have an IRA account, you cannot. These types of decisions take careful thought and planning, what works for your neighbor might not be what’s best for you and you should take that into consideration. You should always carefully take into account the fees, services, and other benefits of each account, and decide what is best for you.