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Stumbling blocks to your 401(k) plan

Watch out. That 401(k) plan that you're banking on for retirement just might be facing a few stumbling blocks.

That's why Jim Cramer warns investors not to only stick with a 401(k); there are hidden downsides to them that might just not make it worth it in the long run.

Some of the limits to a 401(k) are the high management fees and administration costs, but the worst part of a 401(k) is the lack of control over your money and what you can invest in.

"I believe that the best way to invest, as you know, is to buy a diversified portfolio of individual stocks and do the homework on each one of them—ideally one hour per week per stock—so that you know when it's time to buy more, when it's time to sell something, and when it's time to sell everything."




Businesswoman putting money into 401K jar at desk
Jamie Grill | Getty Images

Most 401(k) plans do not give you that option. They will instead give you a couple of dozen funds to pick from, and most of the time there is not a wide range of options. This is a big no-no for Cramer's investment strategy.

But don't worry—there is always an individual retirement account.

The main difference between an IRA and a 401(k) is that while you do benefit from a tax deferred status, often your company will match your contributions into a 401(k). And everyone likes free money!

In that case, Cramer thinks you should contribute as much money into your 401(k) that is needed to get your company to match, and then stop. Unless you have maxed out your IRA contribution amount for the year, do not put another penny into the 401(k).

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An IRA will tend to have much lower fees, and much more flexibility for investing. If your employer doesn't have a 401(k) match, then just start by contributing to an IRA and keep on going until you max out the yearly contribution amount allowed for the year.

So while a 401(k) plan has a lot going for it, mainly because of employer matching contributions, it is deeply flawed as a sole strategy. Using Cramer's plan to limit contributions and put the rest into an IRA will allow investors to take advantage of the upside, and avoid the downside in the long run.

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