You need to save money for retirement, and the 401(k) allows you to do so. That’s the end of the story, right? Well, many 401(k) plans indeed have great value for workers. However, some problems arise with these retirement plans. If you recognize them, it’s time to act and protect your future nest egg.
Poor Investment Options
You might think that your employer choosing investment options is a good thing, but the problem is that they can lack personalization. Suddenly, the employer chooses options that have higher fees than you’re normally willing to pay. Elsewhere, they might carry more risk (or not enough!).
When it comes to investing, much of the decision making is controlled by your age. When young, we have more time to recover from poor years. With this, it’s normal to take more risks; we seek large returns. On the other hand, we want more conservative investments as we near retirement because we don’t want to lose everything we’ve worked so hard to build, and if something goes wrong, we don’t have much time to recover. We could face retirement with smaller funds than we expected.
We need to choose investment options right for our position in life. While some will need conservative options, others will need options with more risk. If you doubt your 401(k) efficacy for retirement, target-date funds are a strong alternative. Typically, the fund right for you contains the year of your retirement in the name. If you haven’t seen target-date funds before, the idea is to start by taking risks and then slowly get more conservative as you get older.
Of course, we also recommend talking with the plan administrator for tailored advice.
Significant Fees
For many, it’s only when they sit down and look at the numbers that they realize just how many different fees are involved in keeping a 401(k) account. While some are rollover fees, others are annual and can include things like account management and record-keeping. Furthermore, mutual funds come with expense ratios, and there are all sorts of other investment fees. Since it leaves your account directly, it’s easy to miss when you aren’t paying close attention.
As soon as these fees exceed 1% of your portfolio, they are getting in the way of your retirement strategy. For every $1,000 in assets, you’re paying $10. Let’s say you have $1.2 million; this means around $12,000 in fees alone.
Again, the solution is to speak with the plan administrator and look at your prospectus. If you’re paying over 1% of your total portfolio, we recommend requesting index funds or another investment option with lower fees. With index funds, companies in the S&P 500 don’t change too often. Therefore, they’re easier (and cheaper!) to manage.
Sadly, the problem for many participants is that the employer has control. However, we’ve seen cases before where a group of employees requested a change, and it was granted. If you do not remove the high fees, why not start using an IRA to hold your money? Speak with a financial professional because they will advise based on your situation, matched contributions, and whether these contributions outweigh the high fees.
Lengthy Vesting Schedule
Thirdly, another way your 401(k) could ruin your retirement is through a length vesting schedule. If you haven’t seen this phrase before, it describes how quickly you can access funds, and when you’re considered “fully vested.” When do you get access to employer-contributed funds? There’s a risk of losing all employer matches with cliff vesting schedules if you leave the company before a specific date. Only after you reach a certain milestone will you become fully vested.
On the other hand, you’ll gradually become vested with a graded vesting schedule. If you leave after a couple of years, you’ll still have a percentage of employer-matched funds, unlike cliff vesting schedules.
For those who plan to stick with the employer for many years, this isn’t much of a concern; the same is true if you already have years of service with the employer. If you’re unsure of what the future holds, don’t make any drastic decisions before looking at your vesting schedule and learning how the decision will affect you. You should find this information with the plan administrator or with your HR team. In the past, we’ve seen stories of employees nearly quitting only to check their vesting schedule, wait it out a few months and benefit greatly in terms of retirement.
What are the consequences of leaving employment without being fully vested? You’ll have to replan retirement and make up for the lost amount elsewhere.
Summary
As you can see, a 401(k) can hurt your retirement in several different ways. With this in mind, we encourage you to track down your plan. Pay attention to fees, vesting schedules, and investment options. It’s possible to make your 401(k) work for you and your dream retirement with a proactive approach.
