According to the Employee Benefit Research Institute, over the 35 years that workplace savings plans like 401(k)s have been around, the people that utilize them efficiently have more money at retirement than those who do not utilize the program. 401k plans, which require no action on an employee’s part, are playing a larger role in American’s retirement preparations. Below, you’ll find best strategies to take full advantage of these five innovations and new services for 401(k) savers. The payoff can be a welcomed addition in your account to help you live the retirement life you desire.
According to benefits consultant Callan Associates, in 2015, 61% of 401(k) plan individuals were auto-enrolled in their 401(k) program, up from 51% in 2010. The most critical decisions related these plans including enrollment, initial contribution, and future increase in savings, all requires little or no input from the employee. This means that unless you opt out, you will be included as part of the automatic enrollment for this program where typically 3% of your pay is deposited into a 401k account from each paycheck.
According to Lauren Valente, a principal at Vanguard added, automatic enrollment features of 401(k)s plan are turning into something a bit more like a traditional pension plan except for the guaranteed income at the end of retirement, of course.
Your Best Moves
- Auto-enrollment sets you up to earn the max amount of money. Even if you’re at the start of your career and aim to save enough for yourself, try matching your employers contribution. Suppose, you earn $50,000, receiving a 3 percent match rather than 1.5 percent is another additional $750 per year.
- Aim to save money. This includes your employer’s match. Many financial experts say you should aim to save at least 15% of your pay each year, even if you need to start at a lower level. As shown in the graph below, a more aggressive schedule could sum up to almost $20,000 in just the first 7 years. So, if you boost your savings by minimum of 2% of pay per year it will pay off.
- Don’t discontinue your plan when your auto-escalation stops. Once you reach 10% of your pay, your plan will likely to stop boosting your savings rate, but that’s not a message that the amount is enough for you.
Targeting the Right Investment Mix
According to Vanguard, almost 79 percent employers now are starting their employees out in a target date fund, up from 62 percent in 2010.What is a target-date fund? It gives you a preset mix of bonds and stock holdings, appropriate for a particular investor.
New employees aren’t only being steered in the target-date-fund direction but employers are also “reenrolling” their existing employees, into the default investments unless they refuse to get into one or directly say no.
Research shows that investors in target-date funds do better than DIY investors and with less risk. Over the years, investors who held a target fund in a 401(k) at the world’s largest investment companies “Vanguard,” typically earned 7.6% a year vs. 7.2% for DIYers. However some DIYers performed better, but others did far worse.
Your Best Move
- Make target funds (all-in-one) the main ingredient. According to a recent study by Financial Engines, only one out of four target fund investors use it more of their 401(k) portfolio (almost 90%). Wei Hu, a VP at Financial Engines says, those who combine target funds with other funds earns an average of about two percentage points below than those who solely invest in age-appropriate target-date funds. So either jump big on the target date fund or skip it entirely.
- Consider your 401(k) as one piece of the cake. Look beyond if a target fund mix is right for you. A financial advising tool Vanguard’s Investor Questionnaire can help you choose the right level of stocks and bonds mix for you.
- Bypass a target-date plan if fees cost you more. If your plan offers 1% or more fees, see what other options are available on your plan’s website or check the expense disclosures list your 401(k) plan provides. “Perhaps your plan has a lower-cost S&P 500 index fund or an inexpensive bond fund,” says Frei burger.
Offering Personalized Investing Assistance
According to Callan, about 9% of plans offer extensive financial advisory services, 36% offer one-on-one financial services, up 28% from 2013. Your 401(k) probably provides online tools to help you decide the right mix of funds and how much you intend to save.
Another type is ‘managed accounts,’ based on your needs and goals, in which you pay an investing professional to oversee your 401(k) investment account. These types of customized accounts are offered by a similar 36% of plans, Callan added. The advice is often provided by Financial Engines or Morningstar (independent companies). Fidelity, a big 401(k) player, offers this service through a separate division, for a fee 0.3% to 0.7% of assets each year.
Your Best Moves
- Get the second opinion. “Getting a second opinion is always useful, and there’s little downside,” says Freiburger. Having a free session is always helpful and let you know about your top priorities.
- Are you within ten years of retirement? Consider getting extra! Besides personalized investment services, your plan offers you a host of online resources. According to Aon Hewitt survey, if you’re near to close your retirement, you may take help of tools that help you to project your retirement income, or you may benefit from a detailed consultation with a financial advisor hired on your own. (Resources to find a financial advisor include garrettplanningnetwork.com and napfa.org.)
Helping Heal Your Financial Ills
According to Aon Hewitt, 42% of millennial workers have student loans and 79% of them say that student debt is significantly affecting their financial ability to meet their goals. Same as the case with workers, their immediate expenses gets in the way of their retirement savings. That’s why almost 55% of employers offer assistance program like budgeting tips and debt management strategies.
Some employers are bringing in specialized financial services such as PwC, Financial Finesse, and Morningstar’s Hello Wallet (third-party companies) typically at no cost to their employees. The services offer online budgeting tools, individual coaching over phone calls and on-site workshops by certified financial planners.
Your Best Moves
- Achieve a small goal first. Start by setting an emergency fund or analyzing how much you can invest in your new home. “For many people, achieving one goal can encourage them to keep up the progress on other issues,” says Kent Allison, a partner at PwC.
- Working regularly with a financial coach can make a big difference. For your complex issues, check with your employer if they are offering one-on-one assistance program from a financial pro. Most companies foot the bill, but other may require you to pay typically $20 a month. Before signing up their program, make sure they aren’t selling a service or product.
Making Retirement Income Easier
Some companies make retirement income easier for their employees by letting them sign-up for monthly 401(k)s checks. You may also have an option to roll your money from your workplace plan into your Individual Retirement Plan (IRA) some companies found that this rollover flooding could shrink your assets in 401(k) plans, hurting younger employees, says Rob Austin, director of retirement research at Aon Hewitt.
Your Best Moves
- Keep the bulk in your 401(k).
If you’re working in a large company, your employers might require you to pay lower investment fees in your 401(k) workplace plan than you would pay for your IRA. If so, try to keep the bulk of money there. Aon Hewitt reports some 45% of programs let you set up automatic payments series or request a separate withdrawal; you may decide to transfer a single amount to your IRA each year and then make withdrawals from that.
- Get what is best for you. Given all the guidance you receive from 401(k) workplace plan, scrutinize your rollover recommendations, so you don’t blow your retirement savings as you reach retirement.
If you have any questions related to your retirement savings plan, please contact at United Financial Counselors.