Is there a downside to dropping out of my 401(k)?

Question

My employer started offering a 401(k) plan a couple years ago with no employer contribution (we are a small company). I signed up as it seemed like a good way to force myself to save for retirement. Over the years I have become extremely unhappy with the company we use, mostly because they frequently "lose" contributions. I'm not talking about a short lag time, but months where I see no new contributions listed despite money coming out of my paycheck every other week. They always eventually fix it (although how would I know if they're really making it right), but it has happened at least three times, and gone on for months every time. I've never really felt comfortable that I could log in and see a true accounting.

Not realizing there are rules against rolling over a 401(k) while still employed, I made plans to open an IRA, thinking I could roll my money over and close down the 401(k). I've since read about in-service rollovers and know that I am not eligible. At this point, it seems like I have two options:

1. Remain in this 401(k) with a company I wouldn't trust to balance my checkbook until I switch jobs (not currently on the horizon).
2. Stop contributing to the 401(k), open an IRA, and contribute to that instead.

Given the lack of an employer contribution, are there any downsides to (2) besides the minor annoyance of having two accounts? The 401(k) is modest (less than $10,000). Are there, for instance, significant interest losses in having my money split between two accounts in this way?

Answer 1

One possible downside is contribution limit. The 401K contribution limit is $18,000 for 2016, which is more than three times the limit for IRA contributions ($5,500).

Answer 2

If it was me, I would drop out.

You can achieve a better kind of plan when there is no match. For example Fidelity has no fee accounts for IRAs and Roths with thousands of investment choices. You can also setup automatic drafts, so it simulates what happens with your 401K. Not an employee of Fidelity, just a happy customer.

Some companies pass the 401K fees onto their employees, and all have limited investment choices.

The only caveat is income. There are limits to the deductibility of IRAs and Roth contributions if you make "too much" money. For Roth's the income is quite high so most people can still make those contributions. About 90% of households earn less than $184K, when Roths start phasing out.

Now about this 401K company, it looks like the labor department has jurisdiction over these kinds of plans and I would research on how to make a complaint. It would help if you and other employees have proof of the shenanigans. You might also consult a labor attourney, this might make a great class.