First, let’s look at some background on 401Ks. They were created in the 1970s as a supplement to pensions and social security, and were deemed an extra savings vehicle for high salaried employees. So, assuming you have all three – pension, social security, and 401K –you’ve got a three-legged stool retirement fund. But most people don’t. As pensions became more and more expensive to maintain, many corporations switched to 401Ks. So, take away the pensions, and now your three-legged stool is now a two-legged stool that wobbles…a lot. Keep in mind, saving for retirement is a priority for you, but it’s not for your company. So, as with so much of your financial health, you need to take responsibility.
What do you need to know:
1. Since we are so dependent on 401Ks now for retirement, does your plan offer an automatic retirement projection? This company offered feature tells you how much income your current savings will generate when you retire. According to a MetLife report only 28% of plans offer these services. Most offer tools for you, the employee, to figure out on your own.
2. How much does your company match? This is free money so take advantage of it. Initially, you should start with contributing up to the match of your company until you reach the maximum. For 2013, it is $17,500 for the year. This is crucial because if you do not contribute for yourself, the average company only puts in 2.5% of your pay. This is not nearly enough to provide for even the basic costs of living in retirement.
3. How expensive is your 401K to you? The Department of Labor has issued regulations requiring plan providers to disclose the fees that both the company and the employee pay for their 401K. The intention was to shed light on notoriously murky fees because these costs affect your return on investment. If you are paying high fees, this reduces the amount you are earning on your investment returns. (See my post “Understanding Real Returns”) The DOL’s intention was to open your eyes to the impact of fees on your savings.
4. Do you have a great array of investment choices? Twenty-five percent of assets in 401Ks are invested in actively managed U.S. stock funds, while just 9% are in indexed U.S. stock funds. Actively managed funds – in which a fund manager picks stocks to try to beat the market – are more expensive than passive index funds, which aim only to mimic market returns. But brokers often don’t have an incentive to choose the option with the lowest cost to you since they get paid through commissions from investment firms for pricier share classes. Company management doesn’t realize this and think their broker’s advice is “free,” since the compensation fee is bundled into the expense ratio. Well, that simply is not true.
5. Are you maxing out the amount you set aside in your 401K? According to Employee Benefit Research Institute, the amount that baby boomers and Gen Xers are currently saving in their 401Ks falls far short of what they will need for their retirement. This deficit really concerns me, primarily because very few people seem to be paying any attention to it. There should be warning signs with sirens and flashing red lights saying “WARNING: You are heading for a financial crash in retirement. Get prepared! Save more! Spend less and live modestly.”
Research shows that both men and women, but especially women, completely underestimate how much they need to put away for retirement. Women, if getting your financial house in order is of great importance to you – and it should be; (1) take advantage of your 401K; (2) maximize the amount you save in it; (3) analyze your investment choices and; (4) select the ones that best suit your risk tolerance and investment goals; and (5) finally, evaluate the costs associated with your 401K. Also, see what else is out there. If your company’s 401k is not the most advantageous to you and your colleagues, band together with them and request that your employer seek a 401K plan provider with better investment options and cost parameters. If you have done your homework and can suggest some options to them, you’re much more likely to get the response you want.
