The pros and cons of a 401(k) plus alternative and companion options

Read NoW
June 9, 2021

There are several ways to fund your retirement but they are not good in emergencies 

We all know that saving for retirement is necessary. You want to have enough money to pay your living and health expenses, not to mention for extras like travel and leisure and leaving an inheritance for your family. Many people build their retirement fund around a 401(k) plan offered through their employer or other long-term savings plan. The traditional 401(k) certainly has its benefits but it’s not the only choice when it comes to retirement accounts and it’s not what you want to use in case of emergency.

Long-term savings funds, such as a 401(k), have benefits such as employer matching, the creation of a nest egg, and being a security blanket for retirement. They also have their drawbacks, however, depending on the situation you’re in. If you have an emergency, like your car breaks down or you get sick and have to miss work, a long-term savings fund isn’t going to help you. For situations like these, you will want an emergency savings account (ESA) to immediately draw money out of, penalty-free. 

If you don’t have an ESA and only have a long-term savings fund, you may be forced to take a hardship withdrawal or 401(k) loan. The hardship withdrawal will have to meet strict criteria from the IRS and is limited to the exact amount necessary to pay for the need. In addition, you may be subject to a 10% added tax on an early distribution. 

We explain the basics of an employer-sponsored 401(k), look at some other long-term savings alternatives, including different types of IRAs, explain a 401(k) companion called a Living Benefit Account, and talk about the benefits of a new employee-sponsored Emergency Savings Account called SecureSave.

Alternatives and companions to a 401(k) plan:

  • IRA – Traditional IRA, Roth IRA, SEP, Simple
  • Solo 401(k)
  • Cash-Balance Plan
  • Living Benefit Account
  • Annuities
  • Investment Accounts
  • Emergency savings account with SecureSave

The basics of employer-sponsored 401(k) plans

A 401(k) is an employer-based retirement account that gives you tax breaks on the money you contribute. Many employers also offer partial or full matching of whatever dollar amount you contribute. Your contribution is automatically taken out of each paycheck and invested in the funds you’ve chosen as part of your portfolio. It’s often called a “pre-tax plan” because you don’t pay taxes on the money you contribute. You will pay taxes when you withdraw the funds, however. 

Not all employers offer a traditional 401(k). Plus, if you work part-time or you’re self-employed, this type of retirement plan may not be an option. Not to worry. You have plenty of alternatives. We list them below. 

Individual Retirement Account (IRA)

An IRA is another type of tax-advantaged retirement account. IRAs include several different accounts, including individual retirement annuities, trusts, and custodial accounts, which are similar to personal savings plans, only with tax breaks.  

There are a number of different IRAs:

Traditional IRA

Like the 401(k), a traditional IRA is a tax-deferred account. The IRS does not assess capital gains or dividend income taxes until you withdraw the money. Most IRAs come with a maximum amount of money you can invest each year. 

Roth IRA

A Roth IRA allows you to make qualified withdrawals on a tax-free basis. The funds in a Roth IRA are considered “after-tax dollars,” meaning the amount you invest is not tax-deductible. On the plus side, you don’t have to pay taxes on the money when you withdraw it, unlike a 401(k) or traditional IRA.

Simplified Employee Pension (SEP) IRA

An SEP IRA can be opened by self-employed persons and small business owners. It offers an advantage for employers since they can take a tax deduction on contributions. They can make contributions to employee plans on a discretionary basis. You’ll find that most SEPs offer a higher annual contribution limit than traditional IRAs. 

Simple IRA

A Simple IRA (Savings Incentive Match Plan for Employees) is designed for small businesses generally with fewer than 100 employees. Eligible employers can make non-elective contributions of up to 2% of the employee’s salary or match the employer’s contribution dollar-for-dollar up to 3% of his/her salary. 

Solo 401(k)

A Solo 401(k) works a lot like a SEP IRA. If you’re self-employed or don’t qualify for a traditional 401(k), this may be a good alternative for you. The income is tax-deferred until your retirement. There is a maximum amount of earned income you can contribute, although the amount increases once you’re age 50 or older. 

Cash-Balance Plan

A Cash Balance Plan belongs to a class of retirement plans known as “Qualified Plans,” meaning they are tax deferral accounts. It’s ideal if you’re self-employed and successful or you didn’t concentrate on building a retirement fund until later in life. It’s sort of a retirement “catch up” plan. 

You can contribute to your plan in two different ways: contribution and interest credit. The interest credit is guaranteed no matter how the plan’s investments perform. 


Annuities are sold by insurance companies. It will provide you with a set amount of money through recurring payments. You pay a lump sum to the insurance company which then invests the money. You can choose an “income annuity,” which allows you to receive money immediately, or a “deferred annuity,” so that your money can grow over time. Annuities do not have contribution limits. 

Investment Account

You can open an old-fashioned investment account at any financial institution you want. You can also contribute as much as you want to the account. Any profits you see are taxed as long-term capital gains if you hold the investments for a year or more.

401(k) companion: Living Benefit Account

A Living Benefit Account is a type of “non-qualified” retirement plan that can be a companion to a traditional 401(k). It’s a Dividend Paying Whole Life insurance contract that allows you to build equity (cash value) starting the day you open it. Rather than maximum death benefits (as with traditional life insurance), it’s designed for maximum cash value. It also includes Riders so you have more flexibility with your monthly budget. 

Any contributions to a Living Benefit Account are considered after-tax. Plus, since this type of account is not tied to the stock market, you don’t have to worry about the impact of your portfolio if the market experiences turbulence. 

The emergency savings account 

The long-term savings accounts listed above are good options for retirement but what about when emergencies pop up in everyday life that require cash fast? SecureSave is a new type of workplace savings program, designed to help employees build and maintain an emergency savings account and help them feel and be financially secure.  SecureSave provides a savings app to manage elective paycheck deferrals and employer match contributions. Employees have instant access to their funds, can customize their own savings targets, and benefit from employer matching. SecureSave integrates with HRIS and payroll software and is a fraction of the cost of typical financial wellness programs.

Invest In your present and future

Retirement should be a time when you get to explore new passions and find time for the things you enjoy. Unfortunately, you might also experience health crises that aren’t fully covered by Medicare or other health plans and that force you to take out a large amount of money on the spot. To live comfortably, you need enough money to support you in retirement as well as your daily life. A 401(k) is only one avenue. The options we’ve mentioned can be opened in addition to a 401(k) fund or set up as an alternative if you aren’t eligible for one. 

Contact us today to talk about securing your present and future.

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