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Will you be satisfied with the results of your retirement planning?
With the stock market soaring in recent years, there are even more trillions of dollars in 401(k) plans that allow employees to save for retirement and acquire wealth.
About 50 percent of working U.S. households has assets in employer-sponsored plans.
Ironically, the tax advantage is not the biggest benefit of 401(k) plans. The biggest benefit is that it forces employees to save by turning them from spenders to savers.
It’s noteworthy that 401(k)s generally allow people to save more than they can with an individual IRA.
In passing the Revenue Act of 1978, Congress added Section 401(k) to the Internal Revenue Code allowing employees at companies to avoid taxes by deferring some of their pay.
In 1980, now retired from Philadelphia to rural Pennsylvania, benefits consultant Ted Benna thought of an idea. That was to permit his workers to save pre-tax money by putting it in their retirement plans with an employer match.
The popularity of the 401(k) concept soared in 1981 after the IRS issued new rules, which allowed employers to fund the plans in conjunction with payroll deductions.
Fundamentally, employees have to make three decisions: Choose either a traditional or Roth 401(k); decide how much to save to a limit of 20 percent of earnings; and determine what to do with the saved money.
In essence, a traditional 401 (k) means contributions are made before taxes and the tax-deferred funds increase each year until withdrawal at retirement.
With a Roth 401(k), the funds are tax-free as taxes aren’t paid on retirement because they’re paid upfront.
But it’s a moot point depending upon whether a company offers both or one of the plans.
How savvy employees avoid regrets with 401(k) plans:
- They study the plans. Many plans have hidden fees in complicated documents, and they can have layer upon layer of fees. Plus, even the plan administrator tacks on fees. Fees should be well below 2 percent. (Note: Plans with more than 100 participants are required to use form 5500, which explains the fees and annual reporting requirements.)
- If fees are excessive or inefficient, employees show confirming data, such as from Brightscope, to the human resources department.
- If the employer doesn’t want to change the fund menus, savvy employees check to see if brokerage-like capabilities are available. If so, employees can choose their own investments. But they still make certain any changes don’t result in excessive fees.
- Savvy employees avoid regrets by starting to save early in their careers and to save as much as allowed.
- They keep saving even if markets fall or they’d like to start saving for a child’s education or a new car.
- They make certain to get the full employer match in funds.
- They make educated decisions about Roth vs. traditional contributions.
- Either they hire a fiduciary advisor, ask for advice from the company’s 401(k) or check the sites of the plans for advice. The plans usually offer customized advice based ability to absorb risk, age and gender, etc.
- As conditions change, it’s important for them to review allocations and if they’re not in a target-date fund, they periodically rebalance allocations usually on an annual basis.
- If they have busy lives and need to simply details, they allocate their savings to the target date of retirement.
- With target-date funds, they make sure they aren’t funds with high fees; and they make certain the target-date funds aren’t too-aggressive.
- They never take participant loans from their 401(k) accounts.
- If changing jobs, they don’t roll over their accounts to an IRA, which means paying expensive advisory fees; they simply roll over to their new employer’s 401(k) plan with no advisory fees.
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The trouble with retirement is that you never get a day off.
-Abe Lemons
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