It is common to hear adages like, ‘Max out your 401(k),’ or ‘Make sure you contribute as much as your employer will match,’ and it is wise to follow these pieces of advice. However, a less commonly heard, but equally important question to consider is, “How will my 401(k) benefit be maximized during my tenure at my job?” To ensure you take full advantage of your employer sponsored retirement plan benefit, begin by understanding the details of your plan, and asking questions, specifically:
What is the Company Match? – Not all companies match employee contributions dollar for dollar. Be sure you know the company match formula and percentage of pay requirement so you’re certain to contribute enough to receive the full employer match. You don’t want to miss out on “free money.”
What is the Plan’s Vesting Schedule? – A vesting period is the amount of time, in years, your employer mandates you must work for the company to be eligible to leave with the full amount of employer match contributions in your 401(k) account. A vesting period can be immediate, deferred a few years, or gradual, where part of the employer contributions vest each year until you are 100% vested. Leaving a company before you are fully vested means losing a portion of your 401(k) benefit.
Is Automatic Rebalancing Available? – Rebalancing involves periodically buying or selling investments to maintain a target asset allocation. Some plans allow you to set up parameters that will trigger automatic rebalancing. Once initial investment selections are made, this feature allows you to responsibly put your 401(k) plan on autopilot. Less maintenance is always a plus.
Many plans also allow participants to automatically allocate future contributions. As cash contributions are deposited into the account, the funds are automatically allocated as you selected during the set-up process. This too means less work for you.
What are the Fees? – Always be mindful of fees because excessive fees negatively impact your rate-of-return. The last thing you want to do is overpay. Participants typically do not have any ability to alter the administrative plan fees, however participants can steer their investment choices toward low fee options. Doing so will increase rate-of-return proportionally. Federal law requires your plan administrator provide a quarterly plan statement that includes a thorough fee disclosure. Ask your plan administration about investment fees and expenses — how much are they and are there ways to minimize those costs?
Do I Have Access to Third Party Advice? – Some plans offer participants one-on-one meetings with investment advisors to determine how best to invest their account. It is to your benefit to meet with the company provided advisor. Their assistance may provide valuable information, specific to low fee investment options that meet your investment objectives.
How Can MCM Help? – If you prefer to seek advice from an independent investment adviser, rather than a company provided adviser, MCM can assist you. We review company sponsored 401(k) accounts for many of our existing clients, typically on an annual basis. We evaluate the available investment options as well as assess fees and investment rates-of-return. After a thorough review, we recommend investments in the plan and advise you how to allocate future contributions.
Taking the time to learn the ins and outs of your plan is the best way to maximize your employer sponsored 401(k) benefits, and head down the path of successful retirement investing.