Is Your 401K Good Enough?
An employer sponsored 401K plan match is one of the better known benefits of having a salaried position. Besides contributing the $18,000 limit annually, the simple answer is yes (with lots of caveats)! Our definition of ‘good enough’ is simply ‘are you on the right track for retirement?’ However, there are also other factors that you should take into consideration. Not all 401Ks plans are created equal. Some employers offer 401Ks plans that are generously matched. There are employers who offer 401K plans with very low management fees. Some 401Ks plans have auto enrollment whereas others do not. Is your tax deferred 401K plan & match good enough?
The importance of having a 401K is astounding. Competitive salary & employee benefits (64%) tops the list when employees are comparing employers 1. Moreover, 43% of workers say they would happily take a lower paycheck in exchange for a bigger 401k match 2.
What is a 401K?
A 401K is essentially an employer managed retirement account. The basic idea behind a company 401K is to gather up a large sum of money from all contributors in order to reduce management fees.
Example: Under Vanguard, you can have different plans for different fees starting with Investor (0.15%), Admiral (0.04%), and Institutional with a 5 million dollar minimum (0.035%).
The money is usually managed by the employer and partly managed by the contributor. The small caveat here is of course, if the 401K plan is managed properly. 401Ks have largely replaced pensions from our parent’s era. 401Ks plans were initially proposed as a cost cutting measure mostly. In the light of seeing how often both private and public pension funds are sometimes mismanaged 3, a company 401K is not allow to take money out of their employee’s 401Ks even under bankruptcy.
What is 401K match?
Many employers offer 401Ks for their employees but not many employers offer 401K matching. Matching is essentially an employer’s promise to throw money into your retirement savings as long as you throw money into your savings. They will try to match you in order to urge you to save – much like a charity marathon fun-run.
If you are in a competitive field that constantly demands new talent, a 401K match is common.
Example: My husband's company sponsors & matches his 401K. My husband maxes out $18,000 a year tax deferred and his employer matches up to 50% of his contributed $18,000. Therefore, my husband's 401K plan tops out at $27,000 annually.
Note that my husband’s employer sponsored 401K plan and match is usually a contender for the Top 10 on the S&P 500 list by most tiers 4. The industry standard for a strong 401K package is one with a generous match. Generally, a 3% match of your base salary or 50% match up to $18,000 is considered a strong 401K plan.
Things to Watch For
The other concern is if your employer happens to have an inferior 401K plan with high management fees and poor investment options. Or if you started saving for retirement at a later age (but we can cover how to correct that later).
In addition, talk to your employer first on how they handle 401K transfers. If you have less than $5000 in your 401K your employer will not do a transfer for you. For 401Ks less than $5000, most often your employer will just cut you a check. Within 60 days, you would have to roll it over to an personal IRA account. This often creates a domino effect since the employee are commonly unaware of the hefty tax-fine if they do not roll their 401K check into an IRA within the IRS allotted time of 60 days. Your 401K is taxed at your current income bracket with an additional 10% tax penalty added on.
The easiest way to know if your 401K is good enough is to give up to the total $18,000 limit. If your employer happens to match, even better. It is good to be mindful of how your 401K plan is being managed by checking up on it at least once a year and definitely do so after a major life event such as a marriage or a divorce. Double check with your 401K packet (or your HR department/employer) directly on how they would handle your 401K transfer. Depending on what investment options are available and your risk tolerance, a yearly rebalance is always a good way to stay on top of your retirement.