Why a 401(k) isn't the wonderful savings tool you think it is

Many people save for their senior years in a 401(k) plan, and for different reasons. For one thing, a lot of employees get easy access to a 401(k) through work, and so it's easier to sign up for one of these accounts rather than have to go out and open an IRA.

Another benefit of 401(k)s is that they come with higher annual contribution limits than IRAs. Right now, savers under 50 can contribute up to $19,500 a year to a 401(k), whereas annual contributions for workers in that age range max out at $6,000 a year for IRAs. And for savers 50 and older, 401(k) limits currently sit at $26,000 a year, compared with $7,000 a year for IRAs.

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But despite these perks, a 401(k) plan may not be your best bet when it comes to finding a home for your retirement savings. Here's why.

1. Investment choices can be limited

When you open an IRA, you're generally given the choice to hand-pick stocks for your retirement portfolio. Doing so could help you grow a lot of wealth in your retirement plan, especially if you know how to research companies well.

With a 401(k), you generally can't invest in individual stocks. That limits your choices and may create a situation where the options you're presented with don't align with your personal strategy or goals.

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2. Fees can be high

Most 401(k)s offer a mix of actively managed mutual funds and index funds, which are passively managed. Index funds commonly charge much lower fees, known as expense ratios, than actively managed funds, but you may not have many to choose from in your employer's plan. As such, you could get stuck paying higher investment fees than you'd like to.

Furthermore, 401(k)s plan come with administrative fees that generally are not negotiable. The administrative fees you'll pay with an IRA are typically much lower.

3. A Roth option isn't guaranteed

These days, a growing number of 401(k)s are including a Roth savings option, which allows you to enjoy tax-free gains in your account and tax-free withdrawals during retirement. But not all 401(k) plans have a Roth version, and so you may get stuck saving in a manner that doesn't fully work to your benefit in terms of taxes.

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With an IRA, on the other hand, putting your money in a Roth savings plan is an option one way or another. If you earn too much money to contribute to a Roth IRA directly -- there are income limits that change from year to year -- you can always fund a traditional IRA and then convert it to a Roth afterward.

Many savers do quite well for themselves housing their retirement cash in a 401(k). But don't assume that a 401(k) is the best savings tool for you. There are plenty of drawbacks associated with 401(k)s, and if you're not particularly happy with yours, then there's no sense sticking with it.

What you should do in that case is contribute just enough money to your 401(k) to snag your full employer match, if one is offered, but then put the rest of your savings into an IRA. Doing so could help you invest more appropriately, avoid high fees, and enjoy the perks of a Roth saving option.

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