Many employers offer 401(k) retirement plans, and it’s usually a good idea to contribute to these programs. Contributions will lower your tax liability in the present, and the contributions often are matched (or partially matched) by the employer. The tax break and the match are basically free money.
But 401(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 should contribute to your 401(k), or if you should contribute at all:
Q: Is there a company 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?
A good plan will offer a wide variety of investment choices that allow you to build a diversified portfolio. A good plan should offer choices covering large-cap, small-cap, and international stocks, bonds, and a cash option (money market fund). Red flags include annuities or company stock as among a few options or the only option.
Q: What are the fund’s fees? Do participants incur sales loads or surrender charges?
Many company plans have funds with high expense ratios, i.e., annual charges that come 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 loads or surrender charges which are triggered when you transfer assets out of a fund.
Q: What should you do if your company plan isn’t very good?
Even if a plan isn’t ideal, it still may provide value to you. If your company provides a match in cash, strongly consider contributing at least enough to get the maximum company match. A 50% match is the same as receiving a 50% return on your investment.
If your plan offers several choices of fund in each asset class, look carefully at your options. Don’t just invest in the fund that had the best returns last year or in the past several years. Look at the expense ratios, and pick the choices with the lowest expenses.
If your company plan does not offer a match or good investment choices, first contribute to a Roth IRA, and then consider making a traditional IRA contribution. 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 choices are limited and/or your expense rations are high. It’s possible you and your colleagues can get your company to reconsider the investment choices it offers.
Fiduciary Tip:
As we learned in the Enron scandal, company retirement plans are not always operated in the best interests of the participants. By asking the right questions, as suggested by NAPFA member Chris Long, you can figure out how to make the most of the options that are provided to you.
Tough Questions To Ask Your Retirement Plan Sponsor
December 12, 2008
By ChrisLong, CFP, NAPFA-Registered Financial Advisor
chris@longfinancialplanning.com
Many employers offer 401(k) retirement plans, and it’s usually a good idea to contribute to these programs. Contributions will lower your tax liability in the present, and the contributions often are matched (or partially matched) by the employer. The tax break and the match are basically free money.
But 401(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 should contribute to your 401(k), or if you should contribute at all:
Q: Is there a company 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?
A good plan will offer a wide variety of investment choices that allow you to build a diversified portfolio. A good plan should offer choices covering large-cap, small-cap, and international stocks, bonds, and a cash option (money market fund). Red flags include annuities or company stock as among a few options or the only option.
Q: What are the fund’s fees? Do participants incur sales loads or surrender charges?
Many company plans have funds with high expense ratios, i.e., annual charges that come 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 loads or surrender charges which are triggered when you transfer assets out of a fund.
Q: What should you do if your company plan isn’t very good?
Even if a plan isn’t ideal, it still may provide value to you. If your company provides a match in cash, strongly consider contributing at least enough to get the maximum company match. A 50% match is the same as receiving a 50% return on your investment.
If your plan offers several choices of fund in each asset class, look carefully at your options. Don’t just invest in the fund that had the best returns last year or in the past several years. Look at the expense ratios, and pick the choices with the lowest expenses.
If your company plan does not offer a match or good investment choices, first contribute to a Roth IRA, and then consider making a traditional IRA contribution. 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 choices are limited and/or your expense rations are high. It’s possible you and your colleagues can get your company to reconsider the investment choices it offers.
Fiduciary Tip:
As we learned in the Enron scandal, company retirement plans are not always operated in the best interests of the participants. By asking the right questions, as suggested by NAPFA member Chris Long, you can figure out how to make the most of the options that are provided to you.