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Roth 401(k)

What is a 401K?

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Of course you’ve heard of a 401k, but what exactly is it, and how do you manage one successfully?  401k plans are an excellent addition to your retirement planning and serve as a dual-feeding investment between you and your employer.  And even though there is an equal monetary deposit between both you and your employer, there are other aspects of the 401k plan that may or may not bode well for your financial plan.  In the very least, we will break down the nuts and bolts behind the 401k and give you the tools you need to decide whether it is right for you.

First and foremost, what is a 401k, and how does it work?  401k plans are retirement savings plans sponsored by your employer.  It allows employees to invest and save a portion of their paycheck before taxes are deducted.  Taxes are then taken out once the money is removed from the account.  With a 401k, you decide how your money is invested.  Most plans offer a spread of mutual funds composed of stocks, bonds, and money market investments. The most popular option tends to be a combination of stocks and bonds, which gradually become more moderate as you reach retirement.

Next comes the question of how much you should invest.  If your employer is matching your timely investment percentage each paycheck it would benefit you greatly to keep your 401k contribution at a feasible amount.  Obviously, manage your finances and ensure that you have enough to live and enjoy life, but keep in mind that retirement planning is important.  If your employer is offering a 50-50 contribution you should take advantage of the plan; don’t leave cash on the table.  The most popular contribution is 3% of your salary.  So, if you earn $50,000 a year and contribute 3%, your personal contribution will be $1,500 and your company’s contribution will be $1,500.  Although you can contribute over 3%, your company cannot, and this is where the possible drawbacks begin.

The IRS mandates contribution limits for 401k accounts.  As noted, your company will not contribute over 3%, and the total dollar amount that can be contributed—including both your contributions and your employers’—cannot exceed 100% of your salary.  In most cases, you can’t tap into your employer’s contributions immediately.  There are complex rules about when you can withdraw your money and costly penalties for pulling funds out before retirement age.  This is why most employers hire investment administrators to oversee your account.  It is their job to inform you of updates about your plan and its performance, manage the paperwork and assist you with requests.  You can also go to your administrator’s web site or call their help center if you need further assistance.

The final question is which type of 401k you should invest in.  Most companies offer a traditional 401k, where the less common plan is a Roth 401k.

Traditional 401k:

  • Wages are contributed before taxes from each paycheck, like a deferred salary.
  • Taxable income drops by the amount you contribute.
  • You pay income taxes on contributions and earnings upon withdrawal.
  • No access to your funds before age 59 ½ or if you leave your employer at age 55 or older.
  • If you dip in early, expect a 10% penalty — on top of the usual tax bill.

Roth 401k:

  • Contributions are made with money that’s already been taxed.
  • No taxes paid upon withdrawal.
  • Better flexibility: free access to your money as long as you’ve held the account for 5 years.

As you can see, there are benefits and drawbacks to both 401k retirement plans.  It is essential to survey your finances and what types of savings plans are right for you.  401k plans are great because of the contributions made by your employer, and the flexibility of deciding how much you’d like to contribute.  Don’t hesitate to ask if you have any further questions or comments regarding 401k plans or financial management in general.

 

Photo courtesy of http://reviewfound.com

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Five more trends for 401(k) Plans.

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Plan design has as much to do with plan success than any other variable. If plan sponsors believe a retirement plan will help attract and retain talented employees their plan should be reviewed.

Roth 401(k)s are going to continue to gain ground.  

The advantages of tax-deferred savings have long been part-and-parcel of the pitch behind 401(k) plans.  The notion is simple: defer paying taxes on your savings now, and they’ll add up faster, further fueled by the tax-deferred accumulation of earnings on those balances.  And then, the logic goes, you pay taxes on those monies as you withdraw them—years from now—and at rates that, post-retirement, will be lower.

 

Plan sponsors have long been reluctant to push Roth 401(k)s; their pay-it-now concept on taxes at odds with the traditional tax deferral mantra, and their benefits often seen as skewed toward more highly compensated workers.

 

However, these days, it’s hard to find someone willing to predict lower taxes in the future, even post-retirement.  Moreover, today’s younger (and not-so-highly compensated) workers may very well be paying the lowest tax rates they will ever experience.

 

To date, most surveys indicate that the participant take-up rate on Roth 401(k)s remains modest, something on the order of what self-directed brokerage accounts have garnered (and in many cases, appealing to the same audience).  However, the preliminary results of PLANSPONSOR’s annual Defined Contribution Survey suggest that Roth 401(k)s are cropping up on a surprising number of plan menus.  It’s a trend that, IMHO, bears watching. 

via plansponsor.com

There are a number of enhancements to your qualified retirement plan that may be overlooked. An analysis of your plan would be required to determine the best combination for your company.

Please comment or call to discuss how this affects you and your company.

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403(b) plans looking more like 401(k) plans, survey shows

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There has been increased attention paid to 403(b) plans by regulators and more to come. Remember if the plan sponsor contributes to their employees they fall under the ERISAregulations.

Retail mutual fundsgained market share in 403(b) plans last year, while the use of once-popular group fixed annuities fell sharply, a survey by Cerulli Associates, Boston, shows. The firm also predicted mutual funds will play an ever-increasing role in these plans.Retail mutual funds were responsible for 26.4% of assets in 2010, up from 21% in 2009, according to the survey of 20 providers accounting for more than 80% of 403(b) assets. Institutional mutual fund assets edged up to 18.4% from 18.1%.

“The 403(b) market is still about three to five years behind the 401(k) market” in embracing institutionally priced mutual funds, said Bing Waldert, a Cerulli director, adding that moving to institutional mutual funds from group fixed annuities is an evolutionary process for sponsors.

“They are still taking baby steps,” he added. “The organizations may not know the pricing power they have. This reflects the relative immaturity of the 403(b) market relative to 401(k)s.”

via pionline.com

It is important to remember that a 403(b) plan can be an ERISA regulated plan if the sponsor contributes to the employees accounts.

Please comment or call to discuss how this affects your organization.

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Stop Guessing – Start Planning > 4 Traits of the Best 401(k) Plans

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Chart of United States Personal Savings Rate f...
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Fees do matter….excess fees go right to the bottom line and reduce retirement accounts. This is a major cash cow for many brokerage firmsand banks.

So what four traits could give you bragging rights?

(1) Risk Mitigation – Either in-house or by hiring an outside firm or firms, your plan has tools in place to mitigate fiduciary liability. How does that help participants? In short, anything you’re doing to reduce your risks is simultaneously a step to provide a better product to participants. For example, hiring an outside advice provider and creating a taskforce in-house to do due diligence will provide protection for participants.


(2) Value for Fees – You’ve benchmarked fees and services against reasonable competitors. The lowest-cost plan isn’t necessarily the best. It’s important to know what services plan sponsors and plan participants are receiving in exchange for fees.


(3) Employee Programs – Your plan features several tools and services to help position employees for retirement, like auto-enrollment, auto-escalation, professional account management options, investment advice and educational communications.


(4) Employee Behaviors – The best plans have high plan usage, a high savings rate and participants who are well-prepared for retirement. How do you accomplish these? You do items one through three from this list really well, and you have a robust communications plan in place to help your employees understand items one through three. Further, you track, measure and report plan usage, savings rates and participant preparedness to your employees.

via smart401k.com

Many business owners and professional service firms treat their company sponsored retirement plan as a necessary evil. They believe their current service provider is taking care of them and their plan. In many cases this is a mistake.

Please comment or call to discuss how this affects you and your company.

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