An employer-sponsored retirement plan, such as a 401(k), can offer many benefits to help you build retirement savings. Standard plans offer:
- Convenient, routine contributions through payroll deduction. Once you set it up, it just happens each paycheck. No bill to budget for and pay. This makes it more likely you will continue
to make contributions month after month, year after year.
- Contributions with pre-tax dollars. Sure, your qualified contributions would be tax deductible anyway, but unlike other types of retirement
accounts like IRA’s, you don’t have to wait until
tax refund time to get your tax break. It shows up in each paycheck.
- An employer match, often a percentage of salary, as long as you contribute at least that amount. If your employer matches up to 3% of your salary, then putting 3% of your salary into the plan nets you an instant 100% gain. That’s maybe the best deal in all of investing.
But 401(k) plans aren’t without their downsides. One of the biggest limitations is investment options. Not only are options often limited, they can be higher in cost than most workers realize. A National Association of Retirement Plan Participants study recently determined that 58% of workers don’t even realize they are paying fees on their employer-sponsored plan savings. And many of those who did know they were paying fees didn’t know how much.
It’s easy to see the plan or administration fee, which is usually a small cost of a few dollars or up to $60 a year. That shows right up on your statement. If you don’t see it, your employer may actually be paying it for you.
But the larger cost is probably not covered by your employer. I’m talking about the fees for the funds you own in the plan. And that’s where you have to be careful because there’s a good chance you were assigned “default” options selected by the plan administrator.
And what are those default funds? Well, if your plan is administered by Fidelity, chances are you’ll end up in a proprietary Fidelity target dated fund or a handful of asset-class-based Fidelity funds. That’s a good part of the reason the big Wall Street firms compete to get those 401(k) plans – to tie up a bunch of money in their own profitable funds.
So what can you do if you are in such a plan? Well, here are a few ideas:
- The best thing you can do is research the available options and their costs. Your Northstar advisor will be happy to help you out with that. Just give us a call.
- If you and your spouse have plans available, you could increase deductions to the plan with better options (but make sure to take advantage of both plans’ employer matches).
- And if you meet income thresholds, it may even be advantageous to save more outside of the 401(k) plan (again, after matching).
Yes, I mentioned the importance of the match a few times there. It’s just that important. In fact, it greatly outweighs the negative impact of the limited fund selection and higher fees in many plans. So everything starts with getting your match. After that, we can work with you to figure out your best retirement savings strategy.
Source: Here’s What To Do If Your 401(k) Stinks by Donna Rosato July 16, 2015 Time.com