A recent study done by The Pew Charitable Trust found that 35 percent of private sector workers over the age of 22 don’t work for a company that offers a 401(k) plan. What’s scary is that the 65% that do have a retirement plan offered through the workplace today, still don’t even understand how the plans work and how to maximize the plan for their personal benefit. Terms including matching, profit sharing, vesting, Roth 401(k), target funds, and many more can be overwhelming. In a recent sample I did with my own clients, 10 out of 10 people did not know what a summary plan description was or where to find it on their company intranet.
Having a 401(k) at work is going to be an important savings element for your financial future. Far too often, employees don’t realize they can go to their owner, CEO, Benefits or HR department, and tell them about features they would like to see added to a 401(k). Here are six things to look out for to determine whether or not you have a good 401(k):
- Matching– A good 401(k) plan will offer some type of matching for employees. Some employers don’t add a matching program because they think it will cost too much money, but in reality, it adds more than 15% retention of employees. Without a matching program, there is significant legal regulatory testing in order to keep balance between the highly compensated employees and the non-highly compensated employees on how much they can contribute to their 401(k). A good barometer for a matching program that is of high quality is called a ‘safe-harbor’ plan. This means you’ll get matched $1 for $1 on the first 3% you put in your plan and then you’ll get matched .50 cents for $1 on the next 2% you put in your plan. Effectively, if you put away five percent then your employer will put away four percent. Any match higher than this is something really special in today’s competitive benefits environment.
- Automatic Enrollment– This is an important newer type of feature on a 401(k). Most of us cannot save on our own, so having a plan that opts you into the plan versus you having to opt into the plan is of paramount importance. You also want a plan that will have automatic increases (i.e. increases your savings 1% per year) because this will force you to put away more as your income goes up. We tend to not miss what we don’t see in our paychecks and money in our checking account tends to burn a hole in our pocket.
- Roth 401(k)- A good plan today will offer the traditional pre-tax option for your 401(k) savings but having a Roth 401(k) makes your plan better for all employees. Unlike the current Roth IRA cap of $5,500 ($6,500 for those 50 and older), the Roth 401(k) allows you to put away up to $18,500 ($24,500 for those 50 and older) on an after-tax basis and then never be taxed again. An especially good 401(k) plan will allow for you to mix your contributions of pre-tax and Roth split up at whatever level is best for your personal short-term and long-term tax management plan.
- Automatic Rebalancing- The challenge with most of us is consistently managing our 401(k)’s. Most people set up an initial allocation of funds, and those who do not regularly meet with their financial advisor hardly ever change their 401(k) allocations. This means over time your 401(k) has what is called to be ‘drift’. If you initially set up 20% in international stock, after five years that percentage of your allocation could end up being 17%. This means that one of your categories are currently overweighed this category may be underweighted. This is an easier way of saying you need to sell high and buy low. An automatic rebalancing feature in the 401(k) will allow you to simply click a button and get your current 401(k) mix back to the original allocation.
- Fund Fees less than .50%- Unfortunately, a lot of small employers shift the cost of the 401(k) to the employees versus them paying for the cost themselves. Although rules and regulations had changed where you should have a clear transparency to your 401(k) costs, it is still very difficult to navigate the fees you are being charged in your 401(k). You should review your 401(k) and make sure the internal costs of the funds are lower than .50%. If they are more than that on average, you should be talking to your employer on how just an additional .50% cost to you could affect your overall retirement. The 401(k) is supposed to be set up to help you retire in place of pensions that used to exist, so high cost funds will no help those matters.
- Diversified Fund Choices- This is a tricky topic, but you should make sure you have investment choices that allow you to place your money amongst the spectrum of low risk and high-risk investments. For starters, all 401(k) plans should have target date or retirement date funds. This is the “I don’t want to manage” my 401(k) choice. Beyond that you should have basic choices from stable value funds, bond funds, and equity funds. It is important to ask your employer for specialty funds (which shouldn’t cost them more money) such as real estate investment trusts, technology funds, healthcare funds, and other choices that will give you some more throttle on your 401(k).
If you want oXYGen to review your entire 401(k) plan, please e-mail me at firstname.lastname@example.org.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
CEO and Founder oXYGen Financial, Inc.
Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.