My Employer Doesn't Offer a 401(k). Should I Care?

Yes, you should care. You have a few options.

Many Americans don't have access to 401(k) plans, a lot of which are self-employed or younger workers. Meanwhile, others work for smaller companies without established benefit packages. If your company doesn’t offer a 401(k), you still have options, such as opening an individual retirement account (IRA) at another financial institution.

Key Takeaways

  • If your company doesn't offer a 401(k), you still can save for the future.
  • Individual retirement accounts (traditional and Roth IRAs) let you put away up to $6,000 a year for retirement purposes.
  • Your options may include encouraging the company bosses to adopt a retirement plan.

The Role of a 401(k)

Like many defined-contribution retirement plans, the 401(k) plan takes its name from a provision in the Internal Revenue Code (IRC). Section 401(k) of the IRC was enacted in 1978 to give a tax break to working civilians who deferred income for retirement.

The government never envisioned section 401(k) transforming the way employers and employees handled retirement investments. Those innovations came two years later when consultant Ted Benna created the first true 401(k) plan with the Johnson Companies.

Benna's plan has been copied and modified ever since. As of June 30, 2021 (the most recent data available), 401(k) plans held $7.3 trillion in assets making up nearly 20% of the $37.2 trillion in U.S. retirement assets of any type.

Today, employees can choose to defer income through automatic deductions from paychecks into employer-sponsored 401(k) plans. Deferred money is left untaxed and can be directed to any investments listed in the plan, most of which are mutual funds.

Deferred funds must be left in defined-contribution plans until an employee reaches age 59½ unless special provisions apply; if not, the funds are subject to early withdrawal penalties.

The Reality

Despite the myriad restrictions—and the fact that most 401(k) plans offer somewhat limited investment choices—many workers heavily rely on their 401(k) investments for retirement. Most private American workers simply expect their employers to offer plans, and many retirement planning guides seem to take it for granted that 401(k)s will play leading roles for workers.

The reality is quite different: Only 60% of American workers have access to employer-sponsored defined contribution plans, according to a March 2019 study by the U.S. Bureau of Labor Statistics (BLS), and only 43% were active participants.

Those numbers are actually a little deceiving; access rates climb to 73% and participation rates jump to 57% for full-time workers. The figures are even higher when you exclude unionized labor, where workers have other collectively bargained benefits available. Still, plenty of Americans don't have access to a 401(k) plan and need to find other ways to save for retirement.

Why Your Employer Doesn't Offer a 401(k)

The most common reason an employer doesn't offer a 401(k) is that most of their jobs are entry-level or part-time. The average worker in these positions is either very young or living paycheck to paycheck, so saving for retirement is difficult; most would pick getting more money upfront instead of a retirement plan anyway.

There are other reasons why your employer might not offer a plan. An employer might not have the experience or time to create an individually designed plan or have a go-to financial or trust institution. In these cases, plenty of employers make the decision not to offer benefits rather than spending time and money chasing a good sponsor.

U.S. Bureau of Labor Statistics Report

In a 2018 article titled "The benefits of working for a small business," the U.S. Bureau of Labor Statistics (BLS) reported that defined contribution plans, such as 401(k)-style plans, were available to 47% of workers in small businesses while access to defined benefit plans, like pension plans, was lower at 7%. (The BLS defines small businesses as those with fewer than 50 workers.) While small businesses offer a wide variety of benefits, retirement plan options generally aren't one of them.

Some companies used to offer 401(k) plans but decided to drop them. This sometimes happens because a company is losing money and scrambling to reduce expenses. Other times, it's because new management came in and is looking for a different option, or because workers aren't participating in the plan and it's no longer sensible to keep it open.

Note that for 2021, the 401(k) contribution limit is $19,500 (rising to $20,500 in 2022), with a $6,500 catch-up contribution for those 50 or older.

Alternatives to a 401(k)

The most obvious replacement for a 401(k) is an individual retirement account (IRA). Since an IRA isn't attached to an employer and can be opened by just about anyone, it's probably a good idea for every worker—with or without access to an employer plan—to contribute to an IRA (or, if possible, a Roth IRA).

However, there are limitations to an IRA. It's very unlikely a worker can completely replace a 401(k) with only an IRA. Most glaring is the IRA's contribution limit, which is a relatively paltry $6,000 per year versus the 401(k) limit of $19,500 in 2021 (and $20,500 in 2021).

Some employers offer matching contributions for their 401(k) plans, which is essentially free retirement money for the worker. No IRA can include this kind of matching contribution since the IRA isn't tied to any employer. Given these kinds of limitations, workers should supplement their IRAs with other retirement strategies.

Depending on your employer, it's possible to have other types of retirement plans. These include SEP IRAs, SIMPLE plans, or stock options.

Certificates of deposit (CDs) were once a very attractive savings vehicle, but years of low-interest rates have effectively crippled them as a serious option. There are other riskier or more expensive alternatives for tax-deferred retirement income, such as annuities or permanent life insurance policies.

It's always better to find tax-free or tax-deferred savings vehicles. Once these options have been exhausted, workers can also turn to traditional investments: mutual funds, stocks, bonds, or rental property.

The Value of a 401(k)

A well-run 401(k) can be a boon to retirement savings, but workers can find plenty of other ways to save money. It's too simplistic (and just not true) to say that any company offering a 401(k) is good and every company without one is cheap. Lots of firms offer bad 401(k) plans, just like lots of firms offer other useful benefits. You're better off evaluating the total compensation package and asking yourself, “What does my employer give me to make up for not having a 401(k)?”

Imagine that your employer doesn't offer a 401(k), but a competing firm does. Should you consider switching companies? Your employer might offer higher starting salaries instead of retirement benefits, or maybe your company has stock options, a pension, or another form of alternative compensation.

Self-Employed Options

If you’re self-employed, you don’t have an employer to offer a 401(k) to you. Thus, you still have alternatives. Even if you’re not self-employed, you can open a traditional or Roth IRA. Nonetheless, self-employed individuals have three key options—solo 401(k), SEP IRA, and SIMPLE IRA.

Solo 401(k) 


A solo 401(k) is similar to an employer-sponsored 401(k). However, you, as the self-employed, act as both the employer and employee. Solo 401(k)s offer greater control versus employer-sponsored 401(k) plans—and you can contribute into a traditional or Roth solo 401(k). You can also contribute as both the employee and the employer. 

SEP IRA 

A simplified employee pension (SEP) allows individuals to contribute pre-tax earnings. Only an employee can contribute to an SEP IRA—not the employer. Eligibility includes being at least 21 years old, having worked for the company three of the last five years, and making $600 or more per year. With a SEP IRA, you must contribute the same percentage of income for other employees (if you have them).

SIMPLE IRA 


SIMPLE IRAs are available for small businesses—those with less than 100 employees. They're less expensive than a 401(k) to operate, but operate in much the same way. Employees can contribute pre-tax dollars, while employers can match contributions.

Is a 401(k) Mandatory for Employers?


Most employers are not required to offer a 401(k). However, some states have passed legislation that requires employers to offer retirement plans.

What Do I Do With My 401(k) When My Employer Doesn’t Offer One?

Even if your employer does not offer a 401(k) plan, you can still save for retirement. Options include encouraging your company to set up a retirement plan or opening an individual retirement account (IRA).

Can I Get a 401(k) on My Own?

Individuals cannot open a 401(k) unless their employer offers one. However, if you are self-employed or own a business, you can open other plans, such as a solo 401(k) retirement plan, SIMPLE IRA, or simplified employee pension (SEP).

The Bottom Line

The ultimate value of a 401(k) is determined by two things: how well the 401(k) is run and whether there are other, more useful benefits. If you're counting on each paycheck to just cover your living expenses, then chances are the 401(k) isn't a big deal yet. If you're getting great health or dental benefits instead, you'd probably rather take those benefits and handle retirement investing on your own. Always think in terms of what else you are getting and what your alternatives are.

Article Sources
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  1. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."

  2. U.S. Bureau of Labor Statistics. "Beyond the Numbers," Page 8.

  3. Benna 401(k). "A Brief History of 401k."

  4. Investment Company Institute. "Frequently Asked Questions About 401(k) Plan Research."

  5. Internal Revenue Service. "401(k) Plan Overview."

  6. Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions."

  7. U.S. Bureau of Labor Statistics. "National Compensation Survey: Employee Benefits in the United States, March 2019," Page 3.

  8. U.S. Bureau of Labor Statistics. "National Compensation Survey: Employee Benefits in the United States, March 2019," Page 183.

  9. U.S. Bureau of Labor Statistics. "The Benefits of Working for a Small Business."

  10. Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), etc."

  11. Internal Revenue Service. "Income Ranges for Determining IRA Eligibility Change for 2021."

  12. ADP. “State-mandated retirement plans.”

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