Wednesday, January 29, 2014

Coping with a Bad 401(K)

Coping With a Bad 401(k)

Your retirement rests in your hands like never before. Here’s how to take advantage of even a bad savings plan offered by your employer.
Financial advisors generally suggest maximizing contributions to your company’s 401(k) plan, under which you contribute part of your salary on a post-tax or pretax basis.
In my blog article “4 Signs of a Lousy 401(k) Plan,” I discuss these telltale warnings:
  • An investment menu consisting of proprietary mutual funds from the provider of your retirement plan.
  • Single fund family investment menus that may not offer the best option in every asset class.
  • Expensive share classes.
  • A group annuity wrapper around the plan, often a complicated and generally expensive insurance contract bestowing little benefit to plan participants.
What if your employer’s 401(k) plan is lousy? Here are some tips:
Invest in the plan’s best funds. Even lousy plans often offer at least a couple of decent mutual funds. For stock funds, this could mean either index funds (they must track well-known benchmarks and not charge excessive fees) or actively managed ones (which have good long-term records and risk management, meaning they get pummeled less in down markets).
Focus your contribution on these few investment choices and use investment dollars outside of the plan to complete your portfolio’s overall asset allocation.
Get the full company match. If your company matches contributions, contribute at least enough to receive the full match. For example, if your plan matches half of all contributions up to 6% of your salary, that’s an extra 3% contribution from the company that gives you an instant 50% return on your money. That’s hard to beat.
Contribute to an individual retirement account (IRA). Everyone can contribute the $5,500 maximum ($6,500 if you’re 50 or older) to an IRA for 2013 and for 2014. The deductibility of a traditional IRA contribution depends upon your income and whether your employer’s retirement plan covers you.
Likewise, income ceilings determine whether you can contribute to a Roth IRA.
Take advantage of other retirement savings options. If your spouse’s company offers a better 401(k), maximize contributions to that plan.
Do you run a business on the side? If the business generates income, start a retirement plan. Among the options:
·         Savings incentive match plan for employees (SIMPLE) IRA, which may be established by employers and the self-employed.
·         Simplified employment pension (SEP) IRA, also established by employers or the self-employed and to which the employer can take a tax deduction for discretionary contributions to the plan.
·         A solo 401(k), and remember that any contribution limits apply to your company retirement plan and your self-employed retirement plan combined.
Discuss concerns with your employer. Do your homework and outline your concerns with the plan. New 401(k) disclosure rules may make your plan administrator more receptive to your input.
The rules call for you to have the information you need to make informed decisions, including information about fees and expenses; delivery of investment-related information in a format that helps you clearly compare plan options; and use of standard methodologies in calculating and disclosing your expenses and returns, among other conditions.
Such plans as 401(k)s and similar defined contribution vehicles represent an excellent opportunity to save for retirement via ongoing salary deferral. If your employer plan is one of the lousy ones, look for additional ways to save and invest for your retirement – and diligently make contributions.
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Roger Wohlner, CFP, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Please feel free to contact him with your investing and financial planning questions. Check out his Financial Planning and Investment Advice for Individuals page to learn more about his firm’s services. Roger is active on both Twitter and LinkedIn. Check out Roger’s popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans. He is also a regular contributor to the US News Smarter Investor Blog and has been quoted extensively in the financial press including the Wall Street Journal, Forbes and Smart Money, Roger is a member of NAPFA, the largest professional organization for fee-only financial advisors in the country. All NAPFA Registered Advisors sign a fiduciary oath promising to act in the best interests of their clients.
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