When I meet with clients and offer to review their 401(k) allocations and contribution rates, I often get the impression that the importance of this asset is lost. As pensions have gone the way of the dinosaur, it is more critical than ever to ensure you are taking full advantage of the retirement savings plan your employer offers.
When reviewing your 401(k), make sure you are invested in globally diversified asset allocation based on your goals and risk tolerance, have utilized the lowest cost investments available, are contributing at least enough of your salary to receive any match your employer provides, and you have made a conscious decision about whether any of your contributions should go to a Roth account, if offered.
Fortunately, a law was recently passed forcing companies to disclose the costs within their 401(k) plans to the participants. It is easy for management to ignore the bloated fees within a plan when they are hidden. When companies and employees are made aware of the annual cost, an impetus to make changes is created. I have already seen several firms shifting their investment selections for the better.
The American Taxpayer Relief Act of 2012 provided more flexibility for Roth accounts. You can now convert your existing 401(k) dollars to a Roth 401(k) as long as your employer will allow it. There is no longer a limitation that this is only available if you are eligible for to take a distribution from the plan or on the amount that can be converted. But remember, any amount you convert will be added to your taxable income for the year.
Although these new provisions are helpful to employees, I have also seen changes that will punish employees. My husband’s company announced they would make all of their matching contributions on December 31st, beginning in 2013, as opposed to each pay period.
You can get hurt two ways here – by losing potential growth during the year and forfeiting your match altogether if you leave prior to a designated day, often in the month of December. IBM announced they are making this adjustment and other companies are likely to follow suit. Fortunately, the backlash from the employees at my husband’s company caused management to rethink this decision.
With the average tenure for employees continually decreasing, it’s tempting to cash in a small 401(k) balance when changing jobs instead of rolling them into a lower cost IRA. A few extra dollars in your pocket now can end up costing you dearly in the growth you will have forfeited and can potentially add years to your working life.
The bottom line is that your 401(k) is something that requires just as much planning as any other asset you own. Make sure you take time each year to review your plan with your advisor so you can make any changes necessary to ensure you will reach your goals as quickly as possible.