By Roberta L. Nestor
When is the last time you reviewed your 401k elections? If you started your 401k plan years and years ago, more than likely it is on auto-pilot. You elected a fixed percentage of pay as well as where you want your contributions to be invested. You have set-it up and now you can forget it! Nothing could be further from the truth when it comes to your 401k options. According to Fidelity, 401k savings will represent more than 50% of most individual’s retirement income. It’s time to pay attention to your 401k election options.
Let’s start with how much you are contributing. Did you elect a percentage of pay (optimal) or a fixed dollar amount? Fixed dollar amounts will not increase with salary increases. Another consideration is the election of the catch-up provision for employees over age 50. If you started your 401k before age 50, chances are you haven’t elected to take advantage of the catch-up provision that allows you to contribute an additional $6,000 each year. The maximum contribution if you are under age 50 is set for 2018 at $18,000 (no change) and it is $24,000 if you are over age 50.
Auto-increases within a 401k plan are fairly recent and not available with all plans. The auto-increase feature allows you to elect a fixed percent increase each year. For example, let’s say you are presently contributing 5% of your pay and you elect the auto-increase. You will be able to have a set percentage (typically 1%, 2% or 3%) so that your contribution will automatically increase year by year. This is a great option for younger employees who are not yet at their maximum contribution level. If you consider putting in just 1%, you will never miss it! And, if you have used auto-increase in the past, take a look and see if there is room to increase or change that percentage.
You also need to elect where your payroll contributions (employee) are being invested. Age-weighted portfolios, or target date options have become more common. They are so common, that more and more employers only offer target date type of investments. While they do offer diversification within one investment choice, it is always good to see what else may be available. You are able to elect different investment choices for your contributions versus your employer contributions. Employee and employer contributions can have different allocations, they don’t have to be the same. Employer matches are often looked upon as “free money”, and some of us might look at that as something you might be more aggressive with, while others might want to take less risk with their employer match, just know that it is a choice.
Election for the allocation of existing account values is often overlooked. All too many times decisions to move around 401k balances are decided based on emotion rather than professional advice. If you have a financial advisor or your company has an investment representative or advisor for your 401k – it would be advisable to consult with them before moving account balances around. This is your retirement and history has shown that you can’t time the market.
The next election is for how you want to classify your contribution. Do you want to elect a traditional pre-tax option where your contribution as well as the earnings are tax-deferred? Or find out if your plan offers a ROTH 401k option. ROTH 401ks means you pay taxes on your contribution now, however, all of the earnings will be tax-free at retirement. If your plan doesn’t allow for ROTH 401k options, they might offer after-tax contributions. Similar to the ROTH option, you would be contributing after-tax dollars, however the earnings would be tax deferred. While not as attractive as the ROTH, there are benefits to after-tax dollars as in the future they could be converted into a ROTH (just the contributions, not the tax deferred earnings).
401k plans have become more and more complex and if your plan will represent a significant portion of your retirement income, you need to make sure you are electing the best options for your particular situation. Your financial advisor can offer you the guidance you will need to navigate your plan. The first step is finding out what elections are available to you and what you presently have opted for.
Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services. She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser. Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth. Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Roberta can be reached at Nestor Financial Network, 203-876-8066 or firstname.lastname@example.org.