Taking an active roll in managing your 401(k) can pay big dividends
Your 401(k) is your guide to retirement security. With the latest advances in medical technology, people are living longer, and it is not unrealistic for some people to assume that they will be spending as much as 1/3 of their lives in retirement. Here are some of the latest trends in 401k savings, guaranteed to give you (and your retirement future) an edge.
Automatic 401(k) Enrollment
Nearly 40% of eligible workers fail to sign up for available 401(k) plans, and this fact frustrates company executives because they know that non-participants are shortchanging themselves and their futures. According to recent research, these no-shows create a collective $30 billion of remaining retirement matches, as well as the genuine chance that they won’t have enough money to retire comfortably. ¨also, low participation among low to mid-level workers can limit how much higher-paid employees can contribute to their retirement funds, thanks to IRS rules that govern how 401(k) s work.
A growing number of companies are trying to combat these problems by making 401k enrollment automatic for all employees. Unless they opt out, employees participate. The typical plan starts the automated contribution at 3%, and some increase the deduction by 1% every year. This means, of course, that participating companies are shelling out more in matches, something not all companies are willing to do.
Another feature of 401k plans that many employers are currently implementing is what is known as 401(k) Automatic Rebalancing. This option allows participants to select a portfolio of mutual funds that can then be reconfigured as often as every quarter to return it to the first asset weightings.
However, it is essential to know that many of the companies automating enrollment are putting their new hires into extremely conservative investment options, typically money markets and stable value funds to avoid potential lawsuits. Therefore, it is so important for participants to review their asset weightings still occasionally to ensure they always make sense. It’s usually wise for members to reduce their exposure to stocks as they approach retirement.
If you’re a high-paid worker your nonparticipating colleagues are restricting whose ability to contribute, urge your employer to consider this option. If you’re one of the employees who has been signed up automatically, make sure you move most of your money into a stock fund so you can take advantage of long-term growth. Also, consider boosting your contributions each year until you’re contributing the maximum allowed. If you use an auto-rebalance feature, make sure you revisit your asset-allocation strategy at least every few years and make any necessary changes
Life Cycle Funds
Life cycle funds, which tailor investments to a person’s age, are also called “target maturity funds because they make investments geared towards a worker’s planned retirement date. These types of funds are much easier for both employers and employees to use since they are automatic, and work by rebalancing investment and gradually reducing exposure to stocks as an employee nears retirement age. The drawback with this type of fund is that since the investments become more conservative in the end, they may be too conservative for some. If you personally, however, are tired of trying to decide how to invest your 401k best, target maturity or life-cycle options may be something worth considering. If your company doesn’t offer these types of funds, another strategy is to only invest in the balanced fund option that your company has provided you, since these are automatically rebalanced as well.
Implementation of The Roth 401(k)
Roth 401(k)’s are a variation on the traditional 401(k) plans, which allow workers to make after-tax contributions to their plans. With a Roth 401k, instead of getting a tax break on your contributions up front, you can get a potentially bigger one down the road, and all the money withdrawn from a Roth 401(k) in retirement is tax-free. The temptation to overdose on your own company’s stock can be healthy. Since many people feel that they should invest heavily out of loyalty to their place of employment. Many 401(k) investors also think, albeit wrongly, that their own companies’ shares are safer than a diversified mutual fund.
Controlling 401(k) Cashouts
As many financial experts and 401(k) investors will tell you, the worst thing that you can do, barring an unavoidable emergency, is cashing out your 401(K). Employers know this, which is why more and more are making it more difficult for employees to cash out their 401(k). Many employers are also automatically rolling over 401(k) balances of $1,000 or more into IRA’s, rather than sending checks to workers, but these companies usually allow employees the option of keeping balances over $1,000 in their 401(k) plan. The fact is that automatic rollovers won’t stop the truly determined from breaking into their retirement savings, but even if your company sends you a check, you should be sure to deposit it directly into an IRA and resist all temptation to spend it. Your future self will thank you later.
Containing Mutual Fund Fees
The recent mutual-fund scandal, in which major fund providers were accused of helping a handful of favored investors profit at the expense of millions of others, has finally prompted some employers to re-examine the fees they and their workers are being charged for 401(k) accounts. Even a 1% difference in fees adds up over time since it is estimated that someone with a $49,000 balance in a plan could wind up with $82,000 less at retirement if expenses average 1.5% over 30 years instead of .5%.
There are still many 401(k) providers who charge high fees without giving employees the option of a low-cost index or institutional funds. If your employer doesn’t already present your 401k costs to you, broken down in statement form (and they should), you should consider asking for a provider change if it turns out that your only options under the current plan are prohibitive cost mutual funds or annuities
Asking for Advice
It used to be that companies would avoid advising their employees about the best way to invest, for fear of lawsuits, which is why millions of confused employees are at this very moment, trying to figure it out on their own. Recently, Labor Department guidance and the spread of inexpensive Internet options are gradually making companies more comfortable with the idea. Approximately 25% of large-company employers offer individualized advice either online, over the phone or in person-to-person consultations. Another 44% of employers said they were either very or somewhat likely to add information in the coming year. Online providers can be a bit complicated to use, and offline providers might not be able to advise on a worker’s other holdings, such as IRAs and college funds. The option many workers would prefer, face to face individualized advice isn’t widely available. If your company offers any advice option, it is in your best interests to take advantage of it. Even if you choose not to follow the recommended game plan, you will at least be getting a second opinion and possibly early warning of potential problems with your portfolio. If you’re currently not receiving any help, consider seeking out help from your certified financial planner.
Remember, 401(k) trends may come and go, but your investment choices today are the backbone of your future retirement security. Review your 401(k) plan carefully, discuss all options with your company’s Benefits Department, your certified financial planner, and your tax advisor, and you will be well on your way to ensuring a better retirement.