Jim Cramer comes out with some doozies occasionally and this one has to be right up there with some of his dooziest. In his opinion it would be a better idea to buy a few stocks on your own than to get involved with your 401(k). In his words most 401K plans “stink” and to be fair his points have some validity:
“They have high management fees and administrative costs that eat into your returns, and worst of all, they typically offer you lousy choices for your investments and not nearly enough control over them,” Cramer added. “The 401(k) business is a racket for the managers who get to charge you these fees.
Yes, in some cases that is true, but hardly in all. Furthermore, this “fee and administrative costs” business is rather ridiculous. Yes they charge management fees, but no more than if you bought the fund on your own. In many cases they are much cheaper as they often offer an “institutional” class of shares for 401(k) customers. Now, in some plans the fees truly are too much and the mutual funds are not the greatest. Often these plans are offered by smaller employers who may not even realize that they could get a better program. Still, there are a few clunkers out there, but generally speaking the 401(k) is a great deal even in expensive plans with limited fund choices.
While Mr. Cramer does acknowledge that the tax-deferred status is a positive, he dismisses even that as a reason to get a 401(k) plan. But this is the main point of the 401(k). Yes, mutual funds have fees and it is possible that if you pick out stocks on your own that you may outperform them (although, I am less confident than he is) and you will likely pay less in total fees. But, you are also throwing away one of the few middle class tax breaks available. Using the 25% tax bracket and a yearly contribution of $4,000 as an example, that is $1,000 that you are not paying Uncle Sam (well, for a long, long time anyway). So out of pocket (paycheck) you pay $3,000 and end up with $4,000 at the end of the year before you have paid a single fee to any mutual fund. Even funds with high fees are not going to come anywhere close to wiping out that advantage. To follow Cramer’s advice would mean that you pay the government that $1,000 and then get $4,000 out of your savings and into a group of individual stocks. Again — ridiculous.
Let’s even put aside the fact that most people don’t want to think about investing, let alone picking out individual stocks and following them and occasionally replacing them with others. He clearly means to be addressing those folks that do have an interest in that kind of investing. But even those people will be hard- pressed to overcome such a large tax break. Thankfully Cramer does offer one exception to his no 401K rule:
And that is, If your employer matches your contribution up to a percentage of income, then he says a 401(k) deserves your attention.
Phew. For a minute there I thought Cramer had gone cuckoo… hey, no wise comments out there, now. As always, individuals have different situations and you will have to do the math based on yours. But for the vast majority of people, I would be very surprised if the 401(k) didn’t turn out to be one of, if not the best investment vehicles available.