What to Do if Your Employer Doesn't Offer a 401(k) — it Could Cost You Millions if You Don't Take Action

What happens when your employer doesn't offer you a 401(k)? You lose out on money, naturally. Intuitively, you know that. But have you ever stopped to calculate just how much you're losing out on if you don't have an employer plan?

Employer-sponsored 401(k) plans have turned into one of the most popular ways that Americans save and invest for their retirement. However, many companies, particularly small businesses, find that it's too expensive to offer employees access to a 401(k) plan.

According to a March Bureau of Labor Statistics study from 2019, 60% of American workers have access to employer-sponsored defined contribution plans. Only 43% were active participants, but that's a different issue.

Too many people don't have access to an employer-sponsored retirement plan. Here's what you can do about it if you've found yourself in that situation.

How Much You Need to Save to Build a Million-Dollar Retirement

Let's figure out how much you'll need to save per month in order to build a million-dollar nest egg. Just for fun, let's consider how much you'll need to save with a 12% return on your investment.

• At age 20: $61 
• At age 25: $109
• At age 35: $345
• At age 45: $1,157
• At age 55: $4,749

First of all, how amazing is it that you can save an average of $345 at age 35 and earn $1 million?

Pretty amazing. 

Is this designed to make you feel bad about not starting your retirement fund at age 20? 

Not at all. 

Is a 12% return high and not necessarily indicative of what you'll earn?

Yes.

The point is, if you aren't saving with the aid of your employer or on your own, you're missing out on millions. Millions.

Option 1: Talk to your employer.

Why might your employer not offer a plan? Your employer might face a lack of experience or time — they might decide it's not worth spending time and money to administer a retirement plan. 

When you approach your employer, try not to appear combative or accusatory. Ask if you can put together a task force to determine how to get better options for everyone in your company, options that would cost your employer less. 

A Department of Labor rule makes it easier for small businesses to join with others to offer a defined contribution retirement plan with unrelated employers, or multiple-employer plans (MEPs). This option brings down costs for both employers and employees, potentially leading to greater growth in retirement assets over time.

Employers can take advantage of association retirement plans (ARPs), offered by existing organizations such as local chambers of commerce or associations formed to administer the MEP and professional employer organizations (PEOs), which contractually assume many employment responsibilities for their client employers. 

Option 2: Open your own account.

You can open an individual retirement account (IRA) if you can't get a 401(k) through your employer. Anyone who has earned income can tap into the two main IRA options — traditional and Roth. 

With a traditional IRA, you put tax-deductible money into an account now and then pay the taxes when you withdraw the money in retirement. A Roth IRA offers the exact opposite: You put money in after paying taxes today. Then, it grows tax-free and you can withdraw it in retirement tax-free as well.

However, you cannot put as much into an IRA as you can a 401(k) — $6,000 a year (or $7,000 if you’re 50 or older). 

You may also want to consider using a brokerage account to stash money because you won't face limits on how much you can invest in a brokerage account. 

Option 3: Fund a health savings account. 

Do you have a high-deductible health plan through your employer? If so, you also have access to a health savings account. You can put pre-tax money in that account, which can go toward your retirement savings. You can carry the amounts in your health savings account over from year to year, unlike a flex spending account, which you must drain at the end of each year.

You can contribute up to $3,600 in 2021 if you have self-only coverage or up to $7,200 for family coverage. If you're 55 or older at the end of the year, you can put in an extra $1,000 in "catch up" contributions.

If you combine this savings with an IRA, it can add up to considerable savings over time.

Option 4: Consider switching jobs.

You might love your job. However, if it doesn't offer a retirement plan, consider getting a different job. The stock market has an average annualized return of over 9% for the past 90 years. This means that your investments double in value every decade. In other words, let's say you make $60,000. You chip in $7,000 and your employer chips in $3,000 for retirement in just one year. This means that your $10,000 would turn into over $76,000 in 30 years with an 8% return. 

You use the rule of 72 to figure this out, and the formula looks like this: 72 / interest rate = years to double

• With a 1% return, it'll take 72 years for your money to double (72 / 1 = 72).
• With a 3% return, it'll take 24 years for your money to double (72 / 3 = 24).
• With a 6% return, it'll take 12 years for your money to double (72 / 6 = 12).
• With a 9% return, it'll take eight years for your money to double (72 / 9 = 8).
• With a 12% return, it'll take six years for your money to double (72 / 12 = 6).

Without the option to invest in a retirement plan, you'll miss out on all of these amazing options. 

You've Still Got Options if Your Employer Doesn't Offer a 401(k)

Whatever you do, consider all of your options in lieu of an employer savings account. In fact, you should be congratulated when you do everything in your power to ferret out a different option if your employer doesn't offer a 401(k). The worst thing you can do is nothing, so do everything in your power to figure out the best alternative option for you, even if that means getting a different job.