By William H. Black, Jr.
Your business has sponsored a 401(k) plan. Careful attention has been paid to plan design, underlying investment options, and employee awareness and comprehension of the Plan’s features and benefits. What could go wrong? Everything is now perfect. Right? Right?
Employers and employees have the best intentions going in, yet things go wrong. The solution is simply staying on top of the program. What are some of the most common mistakes?
Certainly an employee can make the most basic mistake of not participating. Everyone sees that. Let’s look at some other issues that can create underperformance.
Leaving Retirement for “Tomorrow”: Many eligible for participation in the company plan put it off until “next enrollment” because of some reason that has, in the long run, little importance. The sooner you start saving the more you’ll have at the future targeted date. When we’re 25 we never think about being 65, yet it comes so fast! Taking advantage of the Plan has many benefits: Your contribution is income-tax deductible. The employer’s match can be looked at as “free money” and “free return on investment”. Over time those contributions, plus any earnings, can create quite a sizeable account value. Keep putting it off and miss the opportunity; that’s a mistake!
Not Deferring Enough from each Paycheck: Many new plans have automatic enrollment. In other words, an employee is automatically enrolled and will have 3% of each paycheck withheld and sent to their 401(k) account. Employees have to elect not to participate in order to opt out. This is simply a start, however. Saving three percent of income is not enough to effectively get the job done for one’s retirement. The employee needs to increase this deferral percentage to somewhere around the 10% figure so as to create a more robust retirement. Yes, it’s simple and much like our parents preached: save more and spend less! Once the decision is made to withhold those additional monies from the paycheck they’re hardly missed!Amazing what “stuff” we really don’t need.
Ignoring the Benefit of the Employer’s Contribution: If your employer will match your contribution dollar-for-dollar up to 3% of salary, look at that as a 100% gain. You put in $100, your employer puts in a $100 match, your account now has $200 in it, yet only $100 is out of your pocket! Add on the investment results, and you are on your way! This ignores the tax benefits you get from the contribution being deductible from your taxable income.Add it all up, plus the time value of money and the future account value can be quite significant!
Never Changing Asset Allocation: When enrolling in the Plan choices have to be made as to where your contributions will go. In other words, what investment options will you, the participant, choose? That’s where it starts. However, those investment choices should not, generally speaking, be permanent and should be monitored and changed when appropriate. Its remarkable how many participants never change the initial investment choices. Don’t be that person! Are you using the same cell phone you were using ten years ago? Of course not! Investment options in a 401(k) plan need changing from time-to-time too!
Withdrawing or Borrowing from the Account: Need a loan? Usually best to get it anywhere other than from your 401(k) account, even if you do have the discipline to repay it. Loans and withdrawals have more devastating results in reducing the account value than many, if not most, other factors. Withdrawals (not loans) are taxable as ordinary income and subject to a 10% excise tax if under age 59 ½. That money is now unavailable for investing and future uses. Often the withdrawals are for depreciating assets, like a car, etc. Consider the 401(k) account monies as untouchable. Avoid the temptation to access those funds and in the long run you’ll be glad you did.
Ignoring your Account: In other words, pay attention to your periodic statements. Monitor the fund choices, their results, etc. Have a plan! There should be quarterly or semi-annual meetings held to discuss the Plan. At a minimum use that time to monitor your investment allocations, etc. Consider making changes when appropriate. Take action!
Obsessing over your Account: Don’t micromanage! Don’t be “that guy”, the one that checks his account daily, worrying that values dipped this week, this month, etc. These are long term programs. Treat them as long term programs. Don’t try to day trade or follow every newsletter that has the “secret”. Develop a good strategy on how to handle your account’s investments and stick with it, making changes from time-to-time as called for.
Not Rolling over the Account Balance when Leaving the Company: Let’s face it. In today’s society many will have worked for multiple companies by the time retirement comes around. If every time we left one employer for another and took out our 401(k) plan and spent the money in the account, there would be nothing left at retirement age. Don’t fall into that trap! When leaving one company, roll your 401(k) balance into the new employer’s plan. If the new employer’s plan does not allow for it then roll it over to your IRA account. Just don’t take that money and spend it!
The message? Use common sense, discipline and give some thought to the future. When we’re 25 it’s hard to think one day we’ll be 65, but that time arrives quickly! Prepare for the inevitable and do so wisely!
About the Author:
William H. Black, Jr. has been in the pension administration business for 34 years. The firm Pension Services, Inc. administers both defined contribution and defined benefit plans, employs an ERISA attorney, an Enrolled Actuary, and complete clerical staff. Bill is qualified to give continuing education to CPA’s in 47 different states. He has spoken nationally and internationally on retirement plans, has been quoted in USA Today, written articles for several industry journals and has appeared on many financial radio shows discussing the topic of retirement and financial matters.He is a much sought after speaker and author.