Help! My employer doesn't offer a 401(k)

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NEW YORK (Money) -- Question: What should I do if my employer doesn't offer a 401(k)? I feel like I took a pay cut when I accepted my job since I am losing a significant benefit. I already do an IRA, but would like to do more. --S. R., Fort Lee, New Jersey

Answer: I don't know whether you effectively took a salary cut in moving to your new job. After all, it's possible that you also gained some benefits or perks that your previous employer didn't provide.

But I can say that not having access to a 401(k) will make it more challenging for you to save for retirement.

So the question is: How do you respond to that challenge and stay on track toward a secure retirement?

You don't say whether you're doing a regular deductible IRA or a Roth IRA, but I think you should at least consider the Roth for several reasons. One is that you've already put money into a tax-deferred retirement account (the 401(k) at your old job) that will be taxed at ordinary income rates when you withdraw at retirement. Adding a Roth IRA, which offers the prospect of tax-free withdrawals, will allow you to hedge your tax exposure in retirement. (For more on the topic of tax-diversification, click here.)

What's more, the fact that Congress set the same contribution limits for both regular and Roth IRAs effectively allows you to put away more money on a tax-advantaged basis by doing a Roth. (For an explanation of why that's the case, click here.) That ability to save more in a tax-favored way can be a plus for anyone, but it's especially helpful for someone in your position who doesn't have access to a 401(k).

Of course, you can't do a Roth if you don't meet the eligibility criteria, and you can find out whether you do by clicking here. IRS Publication 590: Individual Retirement Arrangements also lays out the Roth criteria, as well as the eligibility guidelines for a traditional deductible IRA.

But with IRA minimums being what they are - just $4,000 for a contribution for the 2007 tax year (which you can still make up until April 15th) and $5,000 for 2008, plus a $1,000 catch up if you're 50 or older - you'll probably want (and need) to save even more.

You won't have trouble finding people who want to sell you all sorts of supposedly ideal investments for your retirement stash. Among the most frequently touted are variable annuities, which are essentially mutual fund portfolios within an insurance wrapper. Their attraction is that gains within a variable annuity compound without the drag of taxes. But I think the downsides - generally blimpish fees and the fact that all your profits, even long-term capital gains, are eventually taxed at ordinary income rates - outweigh the advantages.

Similarly, there are lots of advisers who recommend investing in insurance policies, particularly a type of policy known as variable universal life. The carrot here is that the policy shields investment gains from taxes and even offers the chance of tax-free withdrawals by taking out policy loans. Again, though, I believe the disadvantages in the form of onerous costs as well as some potentially nasty tax complications make insurance policies an inferior choice for most people. (For details, click here.)

Fortunately, there are other investments out there with reasonable fees that also offer some tax benefits that can give you a bigger bang for the bucks you put away for retirement outside your 401(k) and IRA.

Index funds are one such investment. Rather than buy and sell stocks in an attempt to outperform the market, managers of index funds simply buy and hold the securities that make up a particular benchmark, such as the Standard & Poor's 500 or the Dow Jones Wilshire 5000. By trading less, these funds generate fewer taxable distributions, which can ultimately translate to higher after-tax returns.

The same goes for ETFs, or exchange traded funds, most of which are essentially index funds that trade on a stock exchange. Besides their tax efficiency, index funds and ETFs also have the advantage of low fees, which means more of their raw return ends up in your pocket instead of the fund sponsor's.

Another breed of mutual funds known as "tax-managed funds" also has the potential to boost your after-tax returns by minimizing taxable distributions, but managers of these funds employ a more active strategy than index funds. For example, the fund manager might purposely sell some securities at a loss in order to offset gains he or she has taken in other securities. You can learn more about how tax-managed funds work by clicking here.

For the names of specific index funds and ETFs you might buy, consult the index fund and ETF listings in the MONEY 70, Money Magazine's list of recommended funds. To find tax-managed funds, type tax managed into the Quotes box at Morningstar.com. You'll get a few more listings by also typing in tax efficient. (Do not use quotation marks.)

While you're doing this, you might get together with some of your fellow workers and begin lobbying your employer to add a 401(k) to your benefits package. I'm not talking about storming your boss's office with pikes and torches. You want to take a calm approach, appealing to your employer's business sense. You could start by explaining how important saving for retirement is to you and your colleagues and note that a 401(k) plan that makes saving easy and automatic might also make for a more satisfied and productive workforce. It also wouldn't hurt to point out that a 401(k) plan can be a plus for retaining talented workers.

For example, ShareBuilder Advisors' 2007 Small Business Annual Retirement Trends survey found that nearly 40 percent of workers would consider leaving their current job for one that provided a 401(k) plan. Given that the employers polled in this same survey said that it cost about $6,000 a year on average to replace an employee, it wouldn't be a stretch to suggest that adding a 401(k) plan could work to the advantage of the company and the workers alike, in short a proverbial win-win.

It's entirely possible, though, that your boss won't be swayed by this appeal. Your employer may believe that the current benefits package is just fine for attracting and keeping the workers the company needs. In which case, you might want to consider switching again to another job that has a comparable pay and benefits package but also offers a 401(k) plan, preferably one with a decent company match (say, 50 percent of what you contribute, up to 6 percent of your salary, if not more generous).

In the meantime, though, continue putting money into an IRA and, if possible, shovel even more into index funds, ETFs or tax-managed funds (or a combination of all three). Because without your employer's help, you're going to have to be even more diligent to stay on the path to a comfortable retirement.

Are you on track for an early retirement? Tell us why at millionaire@cnnmoney.com. Include your financial details and your family could be profiled in a future column of our Millionaire in the Making series.