Today, the most prevalent way Americans save for retirement is through their employer-sponsored retirement plans, typically 401(k) plans. Unfortunately, since inception, the 401(k) industry has been free of many regulations, legislation and rules. Because of this, many retirement plan participants don’t truly understand the plans in which they invest their hard-earned dollars.
Important 401(k) Questions to Ask:
- What is the company match? Many companies will match some level of employee contributions. For example, when a participant saves 6 percent, the company will contribute 4 percent. It is important to take advantage of any ‘free money’ on the table.
- How much does each investment cost? Every investment fund has a net expense ratio, typically paid by the employee. While these fees may appear small, over a long period of time they can erode performance and make a major difference in the savings one accumulates. Generally anything more than 1 percent is excessive, however in small cap and specialty funds the threshold is a little higher.
- What are your investment options? 401(k) plans usually offer a variety of mutual funds or ETF products, both designed to simplify the investing process for employees. A typical mutual fund or ETF will contain many individual stocks or bonds, allowing one to efficiently diversify in a particular category. It is important a portfolio has exposure to several different categories of stocks and bonds.
- Who pays for the plan? Oftentimes, the costs associated with day-to-day maintenance of the plan are borne to the participants, and automatically debited for your account balance. It’s important to understand not all plans are paid for by the employer.
Given the lack of clarity in 401(k) plans, participants tend to unknowingly make mistakes when investing.
- Poor fund selection: Many plans may contain several funds in a given category (i.e. three Large-Cap Growth mutual funds) to choose from. Participants should only buy one fund in any given category and must evaluate a multitude of factors such as fund manager tenure, expense ratio, long-term performance, etc., when making a decision.
- Not investing aggressively enough: Frequently, participants only take into consideration the number of years remaining until retirement when deciding how aggressively to invest. They fail to realize investing doesn’t simply stop at retirement. It’s critical to acknowledge the fact they will likely be invested in the financial markets for an additional 25-plus years after retiring! The reality is people are living longer than ever and therefore need higher investment returns, even after retiring, to ensure they don’t run out of money.
- Not taking full advantage of the company match: A company match is common, yet not every employee contributes enough to receive the full match. Participants must understand the match formula and make sure they are maximizing the amount of “free money” from their company.
To maximize yo ur success through your 401(k), you must understand the specifics of your plan. There are many resources available to help you. Begin by speaking with your Human Resources department to learn if there is a professional advisor available to assist. Reilly Financial Advisors, a fee-only RIA, is available to provide a complimentary 401(k) tune-up, wherein we can evaluate your plan and provide unbiased advice at no cost.
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