Personal Finance

Five things you probably didn’t know about 401K (but should)

Five things you probably didn’t know about 401K (but should)

American investors own $10.4 trillion in 401,000 assets as of the first quarter of 2022, making 401,000 Away and Away the popular choice for Americans who are saving for their retirement years.

With all that treasure hidden in 401k plans, you might think retirement investors would take the time to figure out exactly what’s in their retirement plans, so they can make informed investment savings and withdrawal decisions.

Unfortunately, this is not a trend.

In fact, a recent study by Dream Forward, a 401k plan provider, showed that 63% of 401k plan owners โ€œdo not understand 401k and financial terms.โ€

As usual in financing methods, a little knowledge goes a long way.

So, while 401k plan providers usually don’t provide much-needed transparency about their plans, it is up to those involved in planning to reveal the so-called “hidden” facts about their 401 plans.

In the dark on major 401k areas

Retirement planning experts say there are many of the 401K features and provisions that plan owners don’t have a good grip on, and this is an issue that needs immediate fixing.

These 401k omissions are at the top of your To Do list.

Plan pricing. One of the biggest challenges 401(k) plan participants have faced for years is opaque pricing.

said Eric Phillips, Chartered Financial Analyst (CFA) and a senior director at Human Interest.

One specific area of โ€‹โ€‹focus should be the 401k plan fee, which can easily dilute the plan’s investment gains. โ€œEven 1% of additional annual costs in managing a 401(k) can result in a 25% or greater reduction in retirement savings,โ€ Phillips said.

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Roth Flexibility Options. Another key aspect of 401k that employees/people don’t know is the ability to contribute a “Roth-like” option to their 401k plans.

โ€œMany large companies allow the Roth investment option although some smaller companies may not,โ€ said Arvind Vene, CEO of Groupe Capital, a financial planning firm. โ€œIf you qualify, this ‘huge ROTH tailgate’ allows 401,000 investors to contribute, potentially much more than regular ROTH contributions, which allow contributions of $6,500 or $7,000 (if over 50) per year.โ€

Whether their plan investment fits their long-term investment goals. One key element of a 401k plan is hidden in plain sight – asset allocation and the underlying investments of managed funds.

โ€œWith the popularity of target date funds/target risk funds and automatic enrollment, people know very little about what to invest in,โ€ said Paul Swanson, Vice President of Retirement at CUNA Mutual Group. โ€œUnfortunately, most of the 401,000 investors have no responsibility to ensure that the investment matches their personal goals and tolerance for risk.โ€

Life Cycle Investment Risks. Another hidden aspect of 401k plans is the lack of understanding of the investment lifecycle pattern, which is a common strategy in retirement plan funds.

โ€œThese are funds that have a year on them, like 2025 or 2030,โ€ said Teresa Arrigo, financial advisor at GenWealth Financial Advisors. โ€œIf investing in individual funds is overwhelming for 401K participants, these funds can be a great way to invest and achieve a level of diversification.โ€

However, what many don’t know is that the bond-to-equity ratio changes on its own with life-cycle money.

โ€œA fund that is 15 years or less past its due date has a much higher bond ratio than many would expect,โ€ Arrigo said. When the fund was selected, the participant might have noticed that there was a large amount earmarked for growth. What they may not know is that the fund is shifting to a more conservative allocation over time.โ€

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Plan renewal errors. Many 401k investors don’t realize that when you leave a company, it’s a mistake to withdraw your 401(k) money directly.

โ€œWhen you leave a company, don’t withdraw your 401(k) money directly because that can lead to significant fees,โ€ said Mindy Yu, chief investment officer at Betterment at Work. Instead, take the opportunity to transfer your 401(k) to your new employer’s retirement plan or to your IRA. We recommend doing this by direct IRA transfer or direct 401(k) pass via check.

It’s time to learn about 401k plans

How can 401k investors learn more about their 401k plan?

The best way to learn more about your individual 401(k) plan is to reach out to the Human Resources/Benefits team.

โ€œYour company benefits specialists should have all the information you need to make sure you register correctly, contribute an appropriate amount, and fully understand the benefits they offer (such as whether your employer offers a 401(k) match, and whether you contribute enough to meet that match). ),” Wu said.

If your company hires a retirement provider or financial advisor to manage and administer your 401(k), they may refer you to a third party to get all the ideas you need.

“It’s important to learn about your 401(k) so you have a good idea of โ€‹โ€‹how the offer works and whether you’re on the right track to having a well-funded retirement,” Wu said.


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