Company 401(k) plans: The dirty secret

(Click for video linked to a searchable transcript of this Mad Money segment)

One of the basics of retirement planning — contributing to a tax-deferred 401(k) plan — could come with a serious downside, said "Mad Money" host Jim Cramer .

"As much as I like the tax-favored status of 401(k) plans, I need to tell you something heretical, something almost nobody else will come out and say: Most company 401(k) plans stink," he said.

"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.

If you have the wherewithal Jim Cramer thinks the best way to maximize your investments is with a diversified portfolio of 5 to 10 individual stocks.

And typically a 401(k) plan doesn't allow for that. "They only let you choose from mutual funds, bond funds and perhaps index funds."

Cramer reminded that the whole premise of Mad Money is predicated on his belief that you can do better than many pros by actively managing your portfolio.

"Sometimes it feels like the whole 401(k) system was set up to benefit the financial services industry, not you," Cramer added.

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However, before you turn your back on the company 401(k) plan all together - Cramer said there is a caveat.

And that is, If your employer matches your contribution up to a percentage of income, then he says a 401(k) deserves your attention.

Largely that's because the return on investment is 100% - and that's before any return that the fund generates.

"I'm a big believer in not turning down free money," he said.

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But only put as much money into the 401(k) as your employer will match.

"Then, the rest of your retirement investing should happen in your IRA until you hit the upper limit on what you're allowed to contribute in a given year. Unlike most 401(k) plans, an IRA gives you the freedom to invest your money whatever way you want," Cramer said.

What should you buy in your IRA?

"Your best bet here is to own high yielding dividend stocks that provide protection and generate income. The goal here is to be able to reinvest your dividends and let them compound year after year after year without paying any taxes until you withdraw your money at the very end, a terrific recipe for producing huge long-term returns."

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