Is a 401(k) worth it for most Americans? 401(k)s are now the go-to retirement savings plans, so one would certainly hope so. These employer-sponsored plans enable savers to deduct money from their paychecks regularly to build a retirement nest egg. But like most things in life, 401(k)s come with pros and cons.
While 401(k)s aren’t perfect, socking money away in a retirement plan at work to boost your chances of a secure retirement is a far better option than not saving at all. “401(k)s are one of the most prominent ways to save for retirement,” says Sarah Darr, head of financial planning at U.S. Bank Wealth Management.
Is a 401(k) worth it?
It doesn’t hurt to know the key advantages — and disadvantages — of 401(k)s, especially since 33% of workers in private industries had access to a defined benefit plan and 19% of workers chose to participate, according to the U.S. Bureau of Labor Statistics.
Pros of contributing to a 401(k) plan
1. An easy way to save for the future
“In terms of getting started, it’s super easy,” says Tim Steffen, director of advanced planning at Baird Private Wealth Management. Employers now make it easy to start saving. Six of 10 companies with 401(k) plans now have automatic enrollment, according to Vanguard. And 74% of plans allow employees to start saving in the plan immediately after being hired. What’s more, about 70% of 401(k) plans now have so-called auto-escalation features that automatically increase your savings each year, typically by 1%. “They’re putting you in the plan right away,” Steffen adds. “There’s literally nothing you have to do to start saving these days.”
2. Pay yourself first
A 401(k) is a form of “forced savings,” says Kelly LaVigne, VP of advanced markets and solutions at Allianz Life Insurance Company of North America. The money you contribute to your 401(k) goes into your account before you ever see it — or have a chance to spend it. “It’s not like you get your paycheck and then have to write a check to your 401(k),” says LaVigne. “You don’t even notice that you don’t have the money, so you don’t miss it.”
3. Contribution limits are high
You can save a tidy sum of money in this type of tax-friendly retirement account given high contribution limits. For 2024, individuals can contribute up to $23,000 in a 401(k) (workers 50 and older can save an additional $7,500 in a catch-up contribution) for a total of $30,500. For 2025, individuals can contribute $23,500 (with the same catch-up contribution for those 50 and older of $7,500), so workers can save $31,000.
In contrast, the maximum contribution in a traditional or Roth IRA (individual retirement account) in 2024 is $7,000 and $8,000 for those 50 and older. These numbers will remain the same in 2025. “You can put away a lot more in a year in a 401(k) than you can in an IRA,” says LaVigne.
4. Tax-friendly perks
Another key benefit is every penny of your contributions and account gains grow tax-free throughout your life. And depending on what type of 401(k) you select; you’ll get additional tax benefits from the IRS.
Traditional 401(k)s, which are funded with pre-tax dollars, give you an upfront tax deduction. So, if you make $75,000, and you contribute 10%, or $7,500, to your 401(k), your taxable income drops to $67,500, which keeps more of your hard-earned money in your pocket. However, you will pay taxes when you withdraw the money in retirement. In contrast, Roth 401(k)s are funded with dollars already taxed by the IRS, but you benefit in retirement because you won’t pay any taxes when you withdraw the money.
5. Earn a company match for "free money"
A major wealth-building benefit of a 401(k) is that most employers deposit money into the account on your behalf. This contribution, known as a company match, is on top of what you deposit on your own. (IRAs, of course, don’t offer a company match as it’s a personal account.) The average 401(k) match is between 4% and 6% of your pay, according to investment platform Carry.
The most common company match is 50% up to 6% of your salary. So, if you earn $50,000 and save 6%, or $3,000, in your 401(k), you’ll also get a company match of $1,500. “The importance of the 401(k) match can’t be understated, says Darr. “The match is a really important part of an employee’s overall compensation plan.”
The key, though, is to contribute enough to your retirement savings plan to get the entire employer match. So, if your company matches up to 6% of your salary, make sure you save at least that much in your 401(k) to avoid leaving money on the table. “Those are use or lose them dollars,” says Darr. The 401(k) match, Steffen adds, “is like free money. Why wouldn’t you want to take advantage of that.”
6. You can borrow money from yourself
While most financial advisors say savers should avoid taking a loan out on their 401(k), having that option does add financial flexibility. In general, IRS rules allow 401(k) participants to borrow 50% of the vested balance or $50,000, whichever is less. The typical payback period is five years, although you’ll have more time to repay the loan from your 401(k) if you use the proceeds to purchase a primary residence, according to the IRS.
7. Professionals manage your investment choices
Most 401(k)s offer a broad menu of mutual funds managed by professional money managers who invest in a diversified basket of stocks and bonds on your behalf. Do-it-yourselfers can pick and choose the fund choices they believe will optimize their account growth over time, says Darr.
But retirement savers who lack investment savvy and don’t want to choose funds or figure out the optimal mix of stocks and bonds based on their age and risk tolerance, Darr adds, can choose an increasingly popular option known as a target-date fund. These funds, offered by virtually all 401(k) plans, are designed to get more conservative as the saver gets closer to retirement, and all the rebalancing of the portfolio’s stock and bond holdings are done automatically by the fund company.
Thanks to the Secure Act 2.0, 401(k) providers can now provide an annuity investment option, which enables the saver to turn all or part of their lump sum 401(k) savings balance into a steady stream of income in retirement. “This provides guaranteed income just like an old-fashioned pension,” says LaVigne.
401(k) plan cons
1. Limited investment choices
Saving via a 401(k) plan means you’ll have a limited menu of investment choices to choose from. The average 401(k) plan offers 18 investment choices, according to Vanguard. “With a 401(k) you’re only able to invest your money in whatever investments the plan offers,” says Steffen. Contrast that with IRAs, which allow savers with accounts at brokerages to invest in stocks and a wide array of funds and other investment choices. Still, Steffen says most 401(k) plans offer a broad enough menu of funds and investment options to choose from and that will allow them to meet their financial goals.
Even though the lack of investment options is often a key complaint, some plans have such a wide assortment of investments to choose from that many investors can still suffer from “paralysis by analysis,” says Steffen. “If the plan has three international stock funds, which one should you choose?”
2. Lack of liquity — your money is tied up
The money you save in a 401(k) isn’t as easy to access as money deposited in a bank savings account or a taxable brokerage account. Why? The IRS imposes a 10% tax penalty on withdrawals made before full retirement age, which for most plans is 59 ½.
So, if you need to yank out $10,000 to pay an emergency bill, you’ll have to cough up $1,000 to the IRS, in addition to paying ordinary income tax on the withdrawal. “It’s really hard to get your money out of a 401(k) before 59 ½,” says Steffen. You may be able to dodge the 10% penalty for so-called hardship withdrawals, Steffen adds.
The inability to get at your money in your employer-sponsored retirement account is a big reason why it’s essential to have a well-funded emergency fund, says Darr. “That way, you don’t have to tap into your 401(k), and your funds are there when you need them down the road,” says Darr.
If you have a true financial emergency, such as medical expenses, foreclosure, an accident, or a funeral or burial, you may take an early withdrawal from your 401(k) without a tax penalty. The rules are strict, so avoid this option unless you fully understand how to use it wisely.
3. Hidden fees
While each fund offered in a 401(k) has a reported expense ratio, it’s much more difficult to get a handle on the fees being charged by the 401(k) provider. While 401(k) providers must disclose how much they charge to manage the plan, they “bury their fees deep within the long and difficult to understand documents, effectively keeping their customers in the dark,” according to a Tony Robbins blog post titled, “Fees matter in your 401(k).” Before you sign up for a fund in your plan, make sure you understand mutual fund share classes.
4. You must take RMDs (required minimum distributions)
The IRS requires 401(k) plan participants to take required minimum distributions (RMDs) beginning at age 73, which means savers must pull money out of their accounts and pay taxes on it whether they need the cash or not.
The verdict
Worth it. Despite the four shortcomings of saving in a 401(k) plan, for most people, the pros far outweigh the cons, experts say. “If you’re not going to save for retirement in a 401(k) plan, where else (are workers) going to save?” says Steffen.
Not worth it. A 401(k) may not be worth it in these instances, though you should crunch the numbers or work with a financial adviser to be certain.
- You have no emergency fund. Don't tie up your cash in a 401(k) if you can't meet emergency expenses.
- Your employer offers no 401(k) match.
- The 401(k) offered by your employer has very high fees. Fees may be offset by an employer match. So, if you have high fees and no employer match, the 401(k) is less likely to be worth it.
- The 401(k) has very limited or poor investment options.
- You plan to retire or leave your employer soon.
- You have credit card debt. It's a good idea to pay off high-interest debt before investing.
