401k Advantages And Disadvantages
401k's are the most popular from of additional compensation given to employees by companies. Each 401k plan is different for each company. However, all of them allow the employees to make contributions into various assets. These assets can include index funds, mutual funds, stocks, bonds, and even company stock. In most cases, the employers will even match a certain percentage of the contributions made out of each employee's paycheck. However, 401k's offer other advantages as well:
1. The power of compounding and deferred taxes.
The main advantage of 401k's for employees is that you can grow the money in these plans through investing and defer paying taxes on contributions until you withdraw the funds.
2. 401k's are highly portable retirement
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Allowing companies to save money here can often create benefits for workers in other ways, such as a business and job itself, higher salaries, etc.
However, 401k's are not without some disadvantages as well. Some of their more common detractors include:
1. Limited investment options.
One of the most common complaints of 401ks is a lack of investing options. This is a particularly contentious one because you have some employees who become overwhelmed with too many choices and want a scaled down option list and there are others who really want to be able to put their funds to work in all kinds of different asset classes.
2. Higher risk than guaranteed pension plans.
Beyond the concern about lack of 401k investment options is that 401k's bring a higher level of risk than guaranteed pension plans. Many employees have seen their 401k's drop significantly in the fall of 2008 showing the riskiness of 401k plans. With reasons like these, there has been a bit of backlash against 401ks although they will likely remain the most popular extra compensation for companies in the near
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