Should You Invest Outside Your 401K?

We’ve talked to you about the benefits of investing in your company-sponsored 401K plan. Utilizing a 401K to save for retirement is a great way to start investing, especially if your employer matches your contributions. It ensures that you invest regularly and you get the benefit of making contributions before taxes are taken out, which allows your money to grow more quickly. But what about investing outside your retirement plan? If you’re already saving for retirement through your 401K, do you need a separate investment account?

401Ks and other retirement plans are a great way to save for the future, but depending on your financial goals, it may be a good idea to open a separate investing account. Here’s why:


When you invest in your company’s 401K plan, you are usually given a limited number of investment options. Typically, your company will work with a financial services provider who offers a limited number of products, usually mutual funds, for your 401K plan. Having fewer choices may actually be a good thing for a number of people as most individuals starting out in their career aren’t stock pickers. The downside here is that mutual funds can be more expensive than investing directly in the stock market (more on this later).


Many people view investing in their 401K plan as a “set it and forget it” exercise. Managing your own investing account (in addition to investing for retirement in your 401K) can give you a greater sense of control over your money. You can also apply the knowledge you gain from investing on your own to managing your 401K. As tempting as it is to put your 401K on autopilot, you should check in at least once year to ensure that your investments make sense for you with regards to your risk tolerance and time to retirement.


As I mentioned before, employer-sponsored 401K plans often limit your investing choices to mutual funds. When you invest directly in the market through a broker, the main cost you need to be concerned with is the commission- how much it costs to buy and sell shares. Some brokers charge a platform fee or a percentage of assets instead of a commission. When you invest in mutual funds, on the other hand, you need to think about two types of fees: the transactional fees that you normally associate with investing and the ongoing fees associated with keeping you invested in the fund, or the expense ratio. Expense ratios are comprised of the cost of hiring and maintaining fund managers, administrative costs (customer support, record keeping, etc.), and 12b- fees (marketing and distribution costs). That’s a whole lot of fees, so it’s easy to see how a high expense ratio can really eat into your profits! For this reason, you may consider investing some of your money in a self-directed investment account which, most likely, will have less costs associated with it.


401K plans are great tools provided by your company to help you save for retirement. But the thing is, they are meant for retirement. If you need to access the money in your 401K before you are 59 ½, you will be hit with a 10% penalty fee on top of paying ordinary income taxes on the withdrawal amount. If you are saving for something other than retirement, such as buying a home, you’ll need access to your money before you retire. For this reason, opening a brokerage account is a good supplement to your 401K plan.


If you are utilizing your company 401K to save for retirement, it may be a good idea to utilize a brokerage account for shorter term goals. In addition to having the ability to easily access your money in case of emergencies or to finance short term goals, having a brokerage account allows you to create a portfolio that you control.

What if; however, you have limited funds for invest at this time? If you can, invest in your 401K up to the point that your company will match- if you’re not investing up to the matching point, you’re essentially turning down free money! Then, invest the amount you can afford beyond that in your brokerage account.

On many investing platforms, such as Beanstox’s investing app, you can create a balanced portfolio on any budget and learn to apply the principles of investing, such as diversification, to other aspects of your financial life, like your 401K plan.