Should I contribute to my 401(k) even if there's no match?

Chances are, at some point in your career, you’ll be eligible to enroll in a 401(k) where you work. The more employees your company has on payroll, the higher your chances of access to a 401(k).

Seeking to attract and retain talent, most employers offer an employer match as an added benefit. In 2021, Vanguard reported that 96% of its 401(k) provided employer contributions. So, when faced with the offer of a plan without an employer match, you may think that it’s just not worth it. To help you make a more informed decision, let’s review key criteria to decide whether or not it’s worth contributing to a 401(k) without employer contributions.

Before we dive in: Why should I contribute to a 401(k) in the first place?

There are a few reasons: 

1. Your future. Retirement lasts one-quarter of your life. You’ll need to fund it one way or another. 

2. Tax advantages. A 401(k) is a tax-advantaged account, which means that you can strategize and save on how much you pay to the IRS in taxes. Let’s say you file your taxes as “married filing jointly” and, together, you earn $85,000 per year. If you contribute $5,000 to your 401(k), you could lower the amount of taxes you owe while building your wealth for the future. (Read more about tax brackets.) That may come as welcome news. Just know that you will be taxed on it later, but at a time when, if all goes according to plan, you’ll be retired and in a lower tax bracket. In the meantime, you keep your money from the IRS and can invest it to help your nest egg grow.

Criterion #1: Level of income

Let’s take a look at two scenarios: high income versus low income.

The high-income case

In 2022, single tax filers with high incomes would still be better off contributing to an employer-sponsored 401(k), even without a match, due to three reasons.

First, once you reach certain income thresholds, you’ll no longer be eligible to enroll in alternative retirement plans, such as a Roth IRA.

In 2023, here are the income limits to be eligible for a Roth IRA:

When you know that your income will continue to be high or you still have plenty of room for income growth, then enrolling in a 401(k) even without a match would still make sense to save for retirement.

Second, high earners may find the contribution limits to a traditional IRA or Roth IRA to be too low. In 2024, you can contribute up to $7,000 ($8,000 if age 50 or over) per year to a traditional IRA or Roth IRA. On the other hand, you can contribute up to $23,000 ($30,500 if age 50 or over) to a 401(k) in the same year. In the specific case of a Roth IRA, you may still qualify for enrollment but not be able to contribute as much as the regular limit. Again, your MAGI determines your contribution limit to a Roth IRA.

Here are the Roth IRA contribution limits for 2023:

*To figure out your reduced contribution limit, refer to the worksheet on Publication 590-A, Contributions to IRAs.

In 2024, individuals aged 50 and over are eligible to make an extra $1,000 in catchup contributions to a Roth IRA.

Third, individuals in certain income brackets can take a diminished deduction from their contributions to a traditional IRA. Even worse, once your MAGI hits a certain limit, your IRA contributions no longer reduce your taxable income.

Here are the deduction limits for IRA contributions in 2023:

*To figure out your reduced contribution deduction, refer to the worksheet on  Publication 590-A, Contributions to a traditional IRA.

High-earning individuals close to retirement age are much better served by a 401(k), which allows them to contribute $23,000 more than an IRA in 2024.

In summary, earners of high income could benefit from contributing to a 401(k) without employer match because they would be able to contribute more and take a higher deduction.

The lower-income case

On the other hand, workers who are just starting their careers could benefit from contributing to a traditional or Roth IRA instead of a 401(k) account with no match. For example, if your annual salary were only $32,000 and you could only sock away 6% of that for retirement, then you wouldn't be anywhere near the $6,500 IRA contribution limit.

In this example, there’s no incentive to stick with the employer-sponsored 401(k) because you don’t benefit from having a higher contribution limit. Additionally, young workers starting their careers have a higher chance of changing jobs several times. So, sticking with an IRA would allow you to keep track of a single plan until they’re able to contribute more than $6,000 per year. Having multiple retirement accounts is generally a bad idea, after all unless you are confident that your fees are low.

Even when contributing to an IRA instead of an employer-sponsored 401(k), qualifying taxpayers can still take advantage of the retirement savings contributions credit, also known as saver’s credit. For example, a couple married filing jointly with an adjusted gross income between $39,501 and $43,000 qualify for a tax credit equal to 20% of their IRA contribution.

Another important consideration for those with low income is that when they know that now is the time that they will be making the least money in their lives, they also know that they’re now more likely to be in their lowest tax bracket. When being stuck with a non-matching 401(k) and low income for a couple of years, those individuals would be better off contributing to a Roth IRA with after-tax dollars.

Review our comparison of 401(k) vs. Traditional IRA vs. Roth IRA vs. myRA.

In summary, earners of low income, young workers, and frequent job hoppers have no incentive to stick with an employer-sponsored 401(k) without a match.

Criterion #2: Fees

There’s no such thing as a free lunch and retirement accounts aren’t exempt from costs. Savvy investors do well in seeking to minimize the fees and charges in their nest eggs. The investment think tank Morningstar concluded that the annual expense ratio of a fund is the only dependable predictor of future performance, even more so than Morningstar’s own popular star rating system.

Here’s an example for a worker in Oregon. If their employer doesn't offer another retirement plan, workers in the state will be signed up for a state-sponsored retirement plan named OregonSaves. (To learn more about Oregon, read our report on Retirement Plan Laws in Oregon.) This Roth IRA plan typically charges an annual expense ratio of 1%. Let’s imagine that the Oregon worker has two options to save for retirement:

• Employer-sponsored 401(k) without a match and an annual expense ratio of 0.07% (our typical fee for employees using our model portfolios)

• OregonSaves Roth IRA with an annual expense ratio of 1%

All things kept equal, the employee would still be better off by choosing the employer-sponsored 401(k). If she were to hold a $10,000 balance, she would get charged $100 and $7 in investment fees in the Roth IRA vs. the 401(k), respectively. Assuming that both retirement accounts offer the same average annual return of 7%, the worker would accrue thousands more over a 30-year period by choosing the 401(k). While they’d reach retirement with a bigger nest egg, they’d still have to consider the potential impact of taxes, which would be applicable to a 401(k) but not to a Roth IRA. 

In summary, consider the following:

• The total annual cost of your 401(k) without a match,

• The total annual cost of alternative retirement accounts, and

• Your best guess as to whether you'll be in a higher or lower tax bracket in retirement compared to now.

Criterion #3: Investment options

Generally, a self-managed IRA provides you with more investment choices than an employer-sponsored 401(k). For example, Vanguard’s website shows more than 100 mutual funds and 76 exchange-traded funds (ETFs) are eligible to use in a Vanguard IRA. In comparison, Fidelity mentions their largest defined-contribution plans offer fewer than 16 investments. Does the number of ​​options matter? What matters more is finding an investment option aligned with your financial goals. ​​

Chances are that your employer-sponsored 401(k) without a match will have at least one target-date fund. In some cases, it may even only offer target-date funds. While target-date funds are convenient, they aren’t suitable for all investors because many charge higher than average annual expense ratios, have variable historical returns, and have a one-size-fits-all investment approach. For a full review of target-date funds, read Target-Date Funds in 401(k) Plans: Good or Bad Idea?.

The industry average expense ratio for target-date funds is 0.51%. If your 401(k) plan without a match were to limit you mostly (or even worse, only!) to target-date funds, you would be incurring a much higher annual expense ratio that would eat away your investment returns.

In that scenario, you would be better off with an IRA or a request to your employer to consider a transfer to a 401(k) service provider that provides access to lower-cost index funds. For example, Human Interest provides retirement savers access to low-cost Vanguard index funds from every major asset class and risk category, with low average annual expense ratios if you use one of our model portfolios. In total, Human Interest gives you the option to choose from a variety of low-cost funds.

In summary, choose a retirement account that gives you the most investment options, especially to low-cost index funds.

The bottom line: Save, if you can!

Do your homework and shop around for all of your available options for saving for retirement. When evaluating whether or not to contribute to your employer-sponsored 401(k), use your level of income, target annual expense ratio, and desired list of investment funds. The sooner that you start saving for retirement, the closer you’ll be to your nest egg’s target.

If you want to set up or switch to a 401(k) that's great for employees and employers, let your company know about Human Interest.

Related article: Are My 401(k) Fees Too High?