How comfortable are you with how much risk you’re taking in your 401(k)? Does your employer offer a Roth option? Are you getting the full employer match? Those are some of the pertinent questions you should be asking about your workplace retirement account, says Denis Higgins, a CPA with Edelstein Wealth Management in Boston.
Higgins looked at a new client’s 401(k) and saw he wasn’t getting the full employer match money because he frontloaded his contributions and the employer didn’t have a true-up provision to make him whole. There was nothing that could be done for that plan year, but management at the small healthcare company where he worked added a true-up provision for the next plan year, so the exec got thousands more in employer match money in his 401(k) account.
There’s no check engine light that goes on, so it’s easy to ignore a poorly tuned 401(k). Easy, but hazardous to your retirement wealth.
Here are some things to check for under the hood.
Check your plan documents. “Know that the plan rules are the rule book,” says Ed Slott, a retirement plan expert and CPA in Rockville Centre, New York. You should download a copy of your 401(k)’s summary plan description (SPD) so you have it to double-check what HR tells you. Does your plan have a brokerage window (you can invest in more than just what’s on the limited plan menu)? Does it allow in-service distributions where you can take penalty-free withdrawals at age 59 ½ even if you’re still working? Does it let you delay required distributions if you work past age 70 ½? Does it allow for traditional aftertax contributions that can help you (combined with your employer) save up to $56,000 a year? These are all provisions that the law allows for, but your employer plan might not.
Fine tune your contributions level. If you are relatively new on the job, you may have been automatically enrolled in your 401(k), with contributions set at just 3% of salary. That’s not enough to fund retirement and might not be enough to capture your full employer match. If money is tight, raise your contributions when you get your next raise. Check if your employer offers automatic escalation, which increases your contribution level for you. If you’re able to save big, aim to contribute the legal max: That’s $19,000 if you’re under 50 and $25,000 if you’re 50 or older (you usually must separately choose to make all or part of the $6,000 catch-up contribution).
Look into the Roth option. Check if your employer offers a Roth option. Instead of making pretax salary deferrals, you contribute on an aftertax basis. Roth money grows tax-free and comes out tax-free, giving you tax flexibility when you start taking money out.
Reassess your asset allocation. If you were automatically enrolled, your money is probably in a target date fund, which reduces your exposure to stocks as you age. That’s not a bad choice, if fees are reasonable. If you’re older and picked your own investments years ago, the bull market may have left you more heavily in stocks than you want. Use an asset allocation tool provided by your plan or a free one such as PersonalCapital.com.
Rebalance. Higgins recommends the auto-rebalancing feature that more employers are offering. “It takes out the emotional decisions,” he says. Otherwise, get quarterly statements and rebalance at least annually to keep on track. At the same time, you should reassess your risk level, taking into consideration any life changes, he adds.
Confirm your beneficiary designations. Remember it’s your beneficiary form—not your will or living trust—that controls who gets your 401(k) when you die. Make sure to name both primary and contingent (alternate) beneficiaries.
Run a lifetime income illustration. Have you modeled how long your 401(k) balance will last over your lifetime? “The challenge a lot of people are having is that they’ve built up this war chest and don’t have any idea what to do next,” says Joseph Adams, an employee benefits lawyer with Winston & Strawn in Chicago. Some employer plans include lifetime income illustrations on your statement. If not, run one on your own. Vanguard has a free retirement income calculator here.
Fees. Some target date funds charge less than 0.10% of assets a year, while others charge more than 1%. You can see how the fees in your company’s 401(k) compare overall at Brightscope.com. Analyze your own fund fees at Personal Capital or FeeX.com.
Author’s note: This is an updated version of an article that ran in 2017.
Source: Tune Up Your 401(k) For 2019