Here’s some trivia for you: In the late ‘70s, an employee benefits consultant named Ted Benna discovered what was then an obscure detail in the Internal Revenue Code. Section 401 would allow employers to sponsor a fairly straightforward tax-sheltered savings plan for employees.

At the time, the idea was unique enough that many met it with a good amount of skepticism. In fact, many in Mr. Benna’s field thought it was outright illegal.

The IRS eventually chimed in and gave its blessing.

401(k) plans grow in popularity

However, 30 years ago, you’d be hard-pressed to find anyone saving and investing money in a 401(k) plan. Not only were the plans new and rare but many employers also still sponsored defined benefit pensions and the like.  

Today, it would require more trivia to name a medium or large business that doesn’t offer a 401(k) plan — or a 403(b) or 457 plan in the public sector. The 401(k) plan has become so common in the workplace that many of us don’t even think twice about contributing. The calculus works out in such a way that, without a defined benefit pension or 401(k)-type plan, the only real option would be to save what you need to save to make retirement an option.

But what about a situation where contributing to a 401(k) plan account isn’t the best choice?  Believe it or not, this is a thing! You should indeed consider some circumstances before you jump right in with “max it out” 401(k) guns a-blazing.

Take, for example, an emergency reserve. What good would accumulating a large sum in a 401(k) plan account do if, when a sudden and large financial need hit, you couldn’t access the money? The foundation of any solid financial plan is an adequate and liquid emergency reserve.

To contribute — or not?

That brings me to a few reasons why you might want to hold off from contributing to your 401(k) plan:

1. You don’t have an emergency reserve. Before adding to your 401(k), fund yourself in case of emergency — or unexpected opportunity. After all, the money you stash long term in your 401(k) for is for another day far in the future — not for you to draw from if an emergency were to occur tomorrow or another day in the short term.

2. You’re in debt. Once you have an emergency reserve set up, the next priority should be paying down debt, especially high-interest debt. Why would you want to approach them in this order? Emergency funding comes first so something unexpected wouldn’t put you further in debt. The debt paydown comes second as, if you were to start your 401(k) before reducing or eliminating debt, the interest on that debt could eat away at your 401(k) returns and hold you back from reaching your long-term goals.

3. You don’t receive an employer match. Consider your incentives to save money in a 401(k) plan in the first place. Usually, the two biggest are

a) a large contribution limit for long-term tax-favored savings and
b) a matching contribution from your employer.

If you don’t have the benefit of an employer match to beef up the amount in your 401(k), you may want to think twice before contributing. If this is the case, consider your other long-term tax-favored saving options, like an individual retirement arrangement (IRA). The IRA caps contributions at $6,000 per year in 2019, but an IRA —traditional and/or Roth — may be a better investment vehicle than a 401(k) for some who don’t receive matching funds.

4. The plan doesn’t meet your needs. Are high fees keeping you from investing in your employer’s 401(k)? What about terrible investment options? These downsides, as well as a lack of features like Roth contributions, in-service distributions, and more, could be good reasons not to contribute to a 401(k). Still, be sure to weigh the potential pros and cons of contributing to make the most educated decision.

These reasons alone won’t necessarily determine whether enrolling in and contributing to an employer-sponsored 401(k) — or not — is the best choice for you. As always, consider your full financial picture. Of course, you should bring your financial professional into the conversation if you want a hand making the decision and to see how it would fit into your plan. The road to financial freedom is a simple series of steps, so take it one at a time — and keep that 401(k) in mind.