Tough Questions To Ask Your Retirement Plan Sponsor
By ChrisLong, CFP, NAPFA-Registered Financial Advisor, chris@longfinancialplanning.com
Many employers offer 401(k) retirementplans, and it's usually a good idea to contribute to these programs.Contributions will lower your tax liability in the present, and thecontributions often are matched (or partially matched) by the employer. The taxbreak and the match are basically free money.
But401(k) plans are not all alike. Companies have a great deal of flexibility,especially in the investment choices that are available to plan participants.Here are some questions that you should ask to determine how much you shouldcontribute to your 401(k), or if you should contribute at all:
Q: Is there acompany match?
Manycompanies match employee contributions. The match is often between $.25 and$1.00 for each dollar the employee contributes, up to a limit. If you make$100,000 and your company has a 50% match on the first 6% you contribute, thenyou would get an additional $3,000 in company match if you contribute $6,000 tothe plan.
Q: Does my plan offer good investment choices?
Agood plan will offer a wide variety of investment choices that allow you to builda diversified portfolio. A good plan should offer choices covering large-cap,small-cap, and international stocks, bonds, and a cash option (money marketfund). Red flags include annuities or company stock as among a few options orthe only option.
Q: What are the fund's fees? Do participants incur sales loadsor surrender charges?
Manycompany plans have funds with high expense ratios, i.e., annual charges thatcome out of your savings. Watch out if the annual expenses are greater than 1%per year, or initial sales loads exceed 5%. Many funds also have back-end loadsor surrender charges which are triggered when you transfer assets out of afund.
Q: What should you do if your company plan isn't very good?
Evenif a plan isn't ideal, it still may provide value to you. If your companyprovides a match in cash, strongly consider contributing at least enough to getthe maximum company match. A 50% match is the same as receiving a 50% return onyour investment.
Ifyour plan offers several choices of fund in each asset class, look carefully atyour options. Don't just invest in the fund that had the best returns last yearor in the past several years. Look at the expense ratios, and pick the choiceswith the lowest expenses.
Ifyour company plan does not offer a match or good investment choices, firstcontribute to a Roth IRA, and then consider making a traditional IRAcontribution. You should even consider a taxable investment in a low-cost,tax-managed, or index fund. These funds have low capital gains distributions,so much of your investment will grow tax-deferred.
Also,talk with your employer's human resources department if your investment choicesare limited and/or your expense rations are high. It's possible you and yourcolleagues can get your company to reconsider the investment choices it offers.
Fiduciary Tip:
As welearned in the Enron scandal, company retirement plans are not always operatedin the best interests of the participants. By asking the right questions, assuggested by NAPFA member Chris Long, you can figure out how to make the mostof the options that are provided to you.