In this month’s EJ’s Economic Edits, I look at 401k plans and some key points that you may be overlooking. Despite the fact that 401ks are the most popular type of employer sponsored retirement plans, we are often surprised by the amount of questions and at times, even the amount of clients that are not taking full advantage of them. One of the first recommendations we make when starting the financial planning process with new clients is threefold. Pay off any high interest credit card debt, allocate a portion of savings for an emergency fund, and participate in your employer sponsored retirement plan, at least up until the match if cash flow allows. Your employer’s potential match is a great way to kick start your retirement savings, for in essence, it's free money.
Traditional employer matches that we often see would work like this: for every dollar of income an employee contributes up to 3% pretax, the employer will match that amount 100%. So instead of getting just your 3% contribution credited, you will receive 6% in total or a 100% immediate return on your contribution. But wait, it can sometimes even be better. Some employers will continue to match an additional 50% on the next 2% that an employee contributes pretax, adding to your savings. So all in with this one hypothetical scenario, an employee contributing at least 6% of pretax income, would receive a total employer match of 4%! As financial planners, we cannot guarantee returns on investments, but we can recommended that free money is hard to come by these days. At times, the employer portion of the contribution can be based on a vesting schedule, where in order to fully take advantage of it, employees must remain at the company for a specified length of time.
If you are starting a new job, it is important to pay attention to the details that a new employer offers in regards to a sponsored retirement plan, including the vesting schedule. Keep in mind these plans are set up in part to attract key talent and thus if you are fortunate enough to be employed by an organization that offers one, you should by all means be taking advantage of it.
Being inundated with new employee information at time of hire, new medical plan options, and insurance can be overwhelming, not to mention the added stress of beginning a new engagement. We have heard directly from clients that at the time of hire, there is often not a lot of proactive employer communication in regards to retirement plan options and/or investment choices available. In response, some just put it off hoping to revisit it at a later date. We say around the office that tomorrow never comes unless there is a plan in place. As a client of Rocco & Associates, we can review your employer sponsored plan options, including investment choices to give our clients guidance on how they should proceed, helping to keep your retirement savings on track.
Once participating in an employer sponsored plan, many simply set it and forget it and do not view this large investment as part of their overall financial plan. This is a mistake, especially considering at times it could be an individual’s largest investable asset. At the firm, we focus a lot on risk and have resources available to help assess it. Assets that we directly manage can easily be tracked and ensure they are in line with one’s personal risk score and how it relates to pursuing your financial planning goals and objectives. With outside investments in an employer sponsored plan, this is more difficult, but surely not less important. Our financial planning software allows the linking of your outside accounts, such as a 401k, so that we can track the risk in the underlying investments and works to ensure that the investment objectives are viewed as part of your overall financial plan, not separate from it.
Overall, if you have questions about the plan that is available through your employer, how it is allocated, and its risk or would like to learn more about linking it to your financial plan, it may be time to give the office a call so we can discuss. In addition, keep a look out for an event we will be holding during the second quarter of 2019, where you will have the opportunity to drop off your employer sponsored plan information for us to review. Until next time, keep the faith and keep saving!