With more and more companies switching from a traditional pension to 401(k) plans it is more important than ever for you to be vigilant and know the most you can on your retirement account. Over the last 36 years 401(k) plans have been the best invention or the worst depending on where we are at in the economy and how people feel about their investment choices. Also many people do not feel qualified or comfortable managing their own retirement accounts and would prefer a professional assist them. Most people had no problems with their 401(k) plan or its administrators during the bull market of the late 1990’s and everyone seemed to hate the same plan during the stock market crash of 2008 and 2009. Of course even the professionally managed accounts regardless of where they were located did not escape the last stock market crash as it was a once in a hundred year event in many opinions. Now let’s look at five ways in which you can maximize your 401(k) plan.
The first thing that you need to know about your 401(k) is what are the fees you are paying the plan’s administrators to manage the funds? Regardless of the plan administrator there will be fees as managing money is not a free endeavor and people do get paid to manage the funds. That is just being realistic as there is no such thing as a free lunch but if your plan’s fees are much more than a percent (1%) then it may be time to talk to your company about changing administrators. Here is a disclaimer though in that regard and it is the larger the company the larger the amount of money that is involved. Larger plans generally are able to charge lower fees as the administrators will make up the difference between higher fees and volume of additional assets under management. To see how much say a half a percentage point will cost you and your retirement funds over a 35 year period simply use Excel and plug in your expected rate of return minus your current fees to get a projected value. Then find a comparable plan that charges a different fee and do the same. In most instances even a half a percentage point can make a huge difference over the life of your account. As an example $25,000 invested with a 7% return and an expense fee of .5% will grow to about $225,000 over 35 years. The same investment with a 1.5% fee would only grow to about $163,000 over the same time period.
If you read my blog on a regular basis you know I am big believer in ROTH accounts and it is no different when it comes to a 401(k). The benefits of a ROTH account are better for lower wage earners as the taxes that are being paid are relatively small compared to someone who may be in their main wage earning years. Also ROTH 401(k) accounts do not have income limits as ROTH IRA’s so if your company offers a ROTH 401(k) anyone is eligible to contribute to them. Tax free money in the future is always a good thing and it allows for tax diversification when it comes to your retirement planning as well. And if you leave your job and roll a ROTH 401(k) into a ROTH IRA there are no minimum distributions at age 70 ½ as with a Traditional IRA.
A majority of companies use the auto enrollment option for new employees and in doing so they generally will place 3% of your salary into the 401(k). Some firms will increase that amount as your wages increase but most will not do so and they will leave your contribution at 3%. Also, most automatic investing will place the funds in the most conservative investment choice or a target date fund. In my opinion both of these options are not really that good as a conservative fund will not outpace inflation as a rule and I find most target date funds to be a tad conservative as well and not a good choice if it can be helped. If you can afford it I suggest you save 10% of your salary in your 401(k) to ensure you will have enough when it comes time to retire.
If you do not contribute 10% of your salary to your 401(k) then please at least contribute up to the amount that your company will match if it does that. Otherwise you are leaving free money on the table and let’s face it an instant positive return is something you never want to give up. After you contribute at least an amount equal to the match try saving the amounts of your raises and live on the same amount as you did the previous year. That way you will not notice the loss of any additional funds as you have set it up on an auto-pilot type scenario. The maximum that a person can contribute to a 401(k) is $17,500 in 2014 and for those over the age of 50 they are allowed an extra $5,500 for an annual limit of $23,000.
And a while ago I wrote a blog on how many individuals do not take advantage of financial advice. If your plan offers any type of financial planning advice it may be worth the effort to examine what it is they offer. In some instances there is a conflict of interest but in many there are some excellent benefits being missed because people just do not take the time to take full advantages of their benefits package.
While investing in a 401(k) is not all that difficult it can be overwhelming at times. Take your time to read and understand what your plan offers and how much it will cost you in fees. If you do have any questions feel free to contact me and I will either address them in a blog if I think may benefit from an explanation or has the same concern as you.