Terry’s Columns Investigate Your 40l(k)

Investigate Your 40l(k)

By Terry Savage on March 14, 2018

After nine years of a bull market, your 40l(k) retirement plan is likely your largest financial asset, perhaps even dwarfing the value of your home. Yet, while you pay attention to home repairs, you many not spend much time inspecting your retirement plan. For sure, you should be contributing the maximum to get your employer’s matching contribution.  Yet many people miss out on this free money.

Here are five more things you should consider about your 40l(k) plan:

  1. Know Your 40l(k) investments.   It’s amazing how many people know their account is growing – but have no idea of their investments inside the plan, having never reassessed their original investment decisions. Most 40l(k) plans have very few choices that are essential a place to “hide” from turbulent markets, since these plans are designed to build retirement assets. Since bonds can be as risky as stocks in a rising rate environment, you’ll want to see if there’s either a money market alternative or a stable value fund to stash some of your account as you get closer to retirement. What was once a conservative asset allocation certainly has become unbalanced with the booming stock market. So the first step is to take a look at the investments inside your plan – and the alternative choices you might now want to consider
  2. Reconsider Target Date Funds. Ever since target date funds were approved as a “safe harbor” investment for retirement plans – meaning the corporate plan sponsor could not be “blamed” for the results – most plans automatically invest contributions in a fund designed to grow more conservative as it approaches your theoretical retirement date.But not all target date funds have the same exposure to aggressive stock market investments. And not all have the same slope or “glide path” toward conservative investing as you age. Understand the risk exposure in a target date plan, instead of assuming it will all work out for the best in the end. Remember, you’ll have to sell shares to take required distributions once you reach age 70-1/2.
  3. Roll Out at Retirement.   Since a 40l(k) plan is designed for workers to take advantage of the growth in the stock market over the long run, it might be worth moving your account by doing an IRA Rollover to a diversified fund company like Vanguard, Fidelity, or T. Rowe Price. That will allow you access to a wider selection of more conservative or income-producing investments.  Make sure this is a direct rollover from your employer to the new IRA custodian since making a mistake could subject your entire account to taxes. And be sure to avoid the army of financial salespeople who are trying to sell you investment products for your IRA Rollover account. You can get free, unbiased advice for asset allocation at these low-cost fund companie
  4. Understand the Power of Your 40l(k) plan. Don’t be tempted to dip into your retirement plan, borrowing for what seems like good reasons – to pay for children’s college, or to consolidate credit card debt. That’s a huge mistake – even though it’s your “own money.”   You lose all the growth the money could have generated. And if you leave your job, you must immediately repay the loan, or face taxes and potential penalties.Think of it this way: This year your employer will withhold 6.2 percent of your paycheck up to $128,400 – a total of nearly $8,000 – to be deposited into the “Social Security trust fund” in your name. You can’t opt out or borrow from it early! Don’t you owe it to yourself to set aside at least the same amount of money in your own 40l(k) account or IRA –money you know will pay off at retirement?
  5. Check Plan Fees and Costs.   Employers are required to disclose all 40l(k) plan fees and costs annually. At www.EmployeeFiduciary.com, you can benchmark your company’s plan costs to see if they are reasonable. If not, get your co-workers together to demand a lower cost plan.

Your 40l(k) plan is your nestegg. It will pay off in the long run if you watch over it closely along the way.  That’s The Savage Truth.



a personal
finance question