401(k) retirement plans have only been around for a little more than 30 years, but will they still be around in another 30? 401(k)s were created as a way for employees to self-direct their own tax-deferred income into a retirement plan. In recent years, however, they have faced increasing criticism for their shortcomings.

What’s the problem with 401(k)s? 

  • First, employees often have too much of their 401(k) invested in their own company. This violates the first rule of investing: don’t put all of your eggs in one basket.
  • Another flaw in the 401(k) system is that retirement funds end up in other risky investments, subject to the swings of the stock market and the economy. If you retire at the wrong time (and you can’t exactly stop aging), you might come up short.
  • Also, since the 401(k) is optional, employees in many cases don’t contribute enough now to guarantee a sound source of retirement income later.
  • Finally, employees can – and frequently do – withdraw the funds at any time to finance the costs of emergency medical treatments or unemployment. Many people have taken this step, even though they must pay income taxes and a 10% penalty on the amount of the withdrawal.

What’s the future of 401(k)s? 

Many employers have started cutting back on matching contributions to their employees’ 401(k)s, further weakening this investment vehicle as a reliable source of retirement income. Additionally, with revenue concerns driving the Washington political climate, there has been talk of ending some of the 401(k)’s tax incentives, which would make them increasingly less valuable. 401(k)s may not disappear entirely in the next 30 years, but don’t expect the 401(k) of tomorrow to be entirely recognizable. Changes might include mandatory enrollment for employees, the passing along of management fees to account holders, and more investment options offered by the employer.

If not a 401(k), then what retirement instrument should you use?

  • Traditional IRA

     These are also tax-deferred investment accounts, but you can put your savings in almost any type of mutual fund, stocks, bonds or other security. There are also exceptions that allow you to withdraw money for medical emergencies and disability without paying a penalty.

  • Roth IRA

     With a Roth IRA, the money you contribute is not tax deductible, but when you withdraw the funds for retirement, the full amount will be tax-free, regardless of how much you have profited or how high your future tax bracket is. With either type of IRA, the amount you can contribute varies by year, and also depends on your income and age bracket. Current contribution levels are about $5,500 for most investors.

  • Tax Managed Mutual Funds

     The money you invest in these is not tax-deferred now or tax-free later, but these funds use investment strategies that not only aim to grow the principle, but keep the tax burden low. They do this by making long-term investments and using other techniques that delay capital gains tax liabilities. There is no limit on how much you can invest in tax-managed mutual funds.

Unsure what type of retirement account is right for you? Scottrade

 provides an easy to use retirement calculator

. This calculator helps you determine the impact of different types of savings accounts.