With each paycheck, you see money being contributed to your 401(k) account. You are counting on this money to provide retirement income for you at some point down the road. Have you ever wondered just how your 401(k) compares to what retirement plans other employers are offering?
The Plan Sponsor Council of America (PSCA) surveys employers to ascertain the preferences in retirement plan provisions and participation rates. The results might give you some answers to the question above. For example, one of the findings of the survey shows that of eligible employees, plan participation was 85 percent in 2017 and the average amount participants contributed to the plans was 7.1 percent of salary.
One of the first items to examine when reviewing your plan is whether your plan offers a Roth choice. This seems to be an increasingly popular option. With the Roth option, money is contributed to the plan on an after-tax basis. There are no tax benefits when the money goes into the plan, but the funds inside the Roth will grow tax free. If certain parameters are met, then the funds are tax-free when withdrawn.
Roth options were available in 70 percent of plans in 2017, and almost 20 percent of eligible employees chose to contribute on a Roth basis. Depending on your particular situation, a Roth option could be a valuable choice. The decision depends on your current and future income levels, tax brackets and tax picture.
Your plan will most likely provide a matching contribution, which is the case with nearly all employers. A few plans do not provide matching contributions. The PSCA survey showed the average company contribution to be 5.1 percent in 2017. How does your plan compare?
If your company offers a match, make sure to take as much advantage of it as possible by putting away at least enough into the plan to receive the maximum match. If you and a spouse both have 401(k) plans, review each plan and develop a strategy to maximize any plan matches available.
Sometimes plans have vesting schedules built into these company matches. This means for each year of employment, you will get to keep a certain percentage of the match if you remain employed. In 2017, less than 40 percent of companies allowed employees to become immediately vested in the company contributions. Does your company have a vesting schedule? If so, it is helpful to understand how long you must work there to receive the full benefit of employer contributions when you leave the company.
One other area plan participants are usually concerned with is the investment choices. The PSCA survey showed the average number of options to be 20. Your plan might not have enough choices. With too few choices, most people can’t obtain the level of investment diversification to meet their needs. In this case, you might consider investing money that is outside of the plan in a way that will diversify the entire portfolio to a level just right for you.
On the other hand, some plans have an overwhelming number of fund choices available. This could make the choice of investment difficult. In this case, we suggest carefully researching your options to find the funds that work for you.
Make sure to review the cost associated with the investment options. Are there low-expense funds (perhaps index funds) that you could choose to put your contributions in? The money you save in fund expenses can add up over time.
No matter how your 401(k) plan compares to others, it might still be your best choice for retirement savings. Review the contribution limits each year to decide what the appropriate percentage is for you and examine whether your investment allocation still meets your goals. Consistently saving in these plans today will help fund your retirement tomorrow.