An employer-sponsored 401k plan match is one of the better-known benefits of having a salaried position. Besides contributing the full limit annually, the simple answer is yes (with lots of caveats), 401ks are a great thing. Our definition of ‘good enough’ is simply are you on the right track for retirement at the end of the day but if the choice is there (and better choices DO exist) it complicates the issues a little more.
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?
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. A company 401K is not allowed to take money out of their employee’s 401Ks even under bankruptcy.
Let’s Begin:6 Tell-tale Signs That You Got A Bad 401(K) Plan
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.
1. You and your employer does not “match.”
Your employer should match the contribution you make to your plan as early as possible. That even depends if your employer would contribute or not. Although it is in your employer’s discretion to match your contribution every month, good employers often match their employee’s contribution by 50%.
According to Bankrate.com, only 10% of the employers match 100% of their employee’s contribution up to 6% of salary. 31% of employers give a considerable 50% while 27% of employers offer between 51-99% contribution. The other 32% of employees match less than half of their employee’s contribution. If your employer opts to not contribute to your plan, that is a sign that you have a bad 401(K) plan.
It is also a bad sign if your employer will only match your contributions after a certain amount of time. Some employers will make you wait until the end of the year to make matching contributions. Time is important in growing an investment, so it is important that your employer would match your contributions as early as possible.
What is a 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 3. 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.
2. Very few or very diverse investment options.
Contribution types is also a thing to consider in a 401(K) plan. Since a portion of your income is usually invested to grow, good investment options should be taken into consideration. Two of the most common sign of poor investment choice are very few, or too much investment choices.
Again, people with little to no training of spotting good investments might have a hard time. When a 401(K) plan have bad investment options, the employee might receive the biggest shock of his or her life when the plan only grew slightly. Good plans should have a handful of solid investment options.
If a plan lacks a good model portfolio (e.g. a lineup which consists of only annuities)no matter how many money and time you put into it, your money will not reach is peak growth potential. Experts recommend a plan that has actively managed fund available low expense ratios.
3. Long vesting schedule.
You can immediately notice if your employer is one of the worst kinds when it comes to taking care of 401(K) plans when you have to wait for a long vesting schedule. A vesting schedule is the amount of time needed to remain in the company in order to have ownership of your employer’s contribution.
The data from the Bureau of Labor Statistics states that only 22% of employers give immediate full vesting. 47% of employers offer a grading schedule in which the longer you stay in the company, the bigger your rights would be in your employer’s contributions. There are graded vestings that last for seven years, with the earliest right being vested after three years at 20%. There are 22% of employers who uses cliff vesting, in which the employee will only have a full right after a specific date. The Pension Protection Act of 2006 requires the date to be no later than three years.
Employees who would want to stay in the company will not have a hard time with graded vesting. However, for those who found a more suitable job or an offer to advance their careers, graded vesting would mean that they won’t have any rights to their employer’s contributions at all if they leave before they start receiving their rights.
4. No automatic enrollment feature.
Automatic enrollment is a feature that lets you contribute a part of your savings automatically. This helps in making regular contributions and avoid missing a month. Choices for opting out should also be available if the employee prefers contributing at a preferred pace.
It is revealed that automated enrollment is a way to make employee participation higher. This is true to younger workers who usually don’t feel the urge to participate in any retirement plans so soon. Fortunately, a lot of companies offer automatic enrollment in their plans. If a plan has no automatic enrollment feature, prepare for more hassle on the way.
5. Fees are high.
Nobody wants to pay a high fee just to save money because honestly, it defeats the purpose of saving. Plan fees can also impact your plan balance. Although these fees are going to legal and accounting services for keeping the plan, a high fee will likely hurt your investment. T
The average rate right now for a small retirement plan for 100 participants is 1.3%. The number is reduced when the participant grows, with 1.08% for 1,000 participants common for big companies. If your plan has a higher fee percentage, this would cost you hundreds of dollars a year.
6. There are eligibility conditions.
Less generous employees usually delay the need for contribution to avoid any hassles and contributing early. Although there are 58% of plans that offers immediate eligibility, there are still almost half of the plans that need eligibility to contribute. Eligibility can be acquired by staying in the company. Some plans require the employee to wait for one year in order to contribute. While other plans require two years before an employer is required to match contributions.
Things to Watch:
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.
What To Do If Your Employer Offers A Bad 401(K) Plan?
A bad 401(K) is literally investing in a bad investment. If your plan has some or all of the signs described above, there are a few actionable things that you can do.
1. Negotiate with your employer.
Ideally, plans should be discussed during the hiring, so you can negotiate with your employer to get a better plan. Having a good retirement plan is a way to keep good employees. Although changes might not be possible, at least you tried.
2. Max out your contribution.
Having a considerably bad plan still holds a lot instead of having none. If you really want to work in that company, one of the best adjustments you can make is to max out your contribution each month based on your employer’s match. That’s applicable only if your employer offers a match at all.
3. Consider other options.
The best solution for a bad 401(K) plan is to invest instead in an IRA. An IRA is simply an account where a person can make a retirement fund. IRAs are typically tax-free when there’s a growth or tax-deferred. You can choose among a traditional IRA, Roth IRA, or Rollover IRA, whichever that fits your needs.