10 mistakes made with workplace retirement plans
Your workplace retirement plan is often the largest part of your nest egg for retirement. Yet, some of the biggest mistakes are made in these accounts every year. A workplace retirement plan refers to a 401(k), 403(b), 457(b), or other deferred compensation plans. Here are 10 mistakes to avoid when using these accounts:
1. Not Participating in your plan
The Plan Sponsor Society of America found that in 2016 only 85% of eligible employees contributed to a plan. This seems like a good number, but it also means that 15% did not and unless they have some other form of retirement income they could be in for a rude awakening.
2. Not contributing enough to your 401(k)
Charles Schwab recently conducted a survey of 1,000 401(k) participants. The survey found that many of them regret saving more money by spending less. Here are some of the top spending regrets:
· 55% regretted not spending less on meals out
· 31% regretted not spending less on expensive clothes
· 28% regretted not spending less on new cars
· 28% regretted not spending less on vacations
· 26% regretted not spending less on newest tech gadgets
There is no “magic” number to save but, the recommend amount is between 10-15% of your income every year.
3. Not contributing enough to get a full employer match
Most workplace retirement plans offer a matching incentive. Which means that your employer will match your contributions up to a certain amount every year, that’s free money. At the very least you should be contributing enough to get the full match.
4. Loading up on too much company stock
Another mistake is investing too much of your savings in your employer’s stock. It may seem like the right investment because you know the employer and believe in the business but consider the risk. In April, The Wall Street Journal profiled a General Electric retiree who had some $280,000 in company stock upon retiring but watched his shares’ value plummet to $110,000. Since April, GE shares have dropped further and many who held large portions in their accounts have suffered
5. Picking the wrong investments
Once Human Resources sets you up in their retirement plan the help usually stops there. Choosing the investments falls solely on the employee (you). Most plans offer limited investment options, so doing the research is important. You can check out Morningstar.com and lookup data on all your options before making your choice.
Consider your goals and objectives when choosing the allocation. If you have a long-time horizon (15 or more years) you should be in mostly equity. We often find younger investors to be overly conservative and miss out on the long-term growth of the market.
6. Ignoring fees
Morningstar.com will tell you the fees each investment fund comes with. Some actively managed funds come with fees over 1% causing them to underperform some of the passively managed ones over time.
7. Ignoring important plan rules
Another blunder is not being aware of the various rules on 401(k) accounts. For example, you generally can’t withdraw money from your 401(k) until age 59 1/2. Take money out before then, and you’ll likely face a 10% early withdrawal penalty. There are some exceptions, though. If you leave your job in the year that you turn 55 or later, you can withdraw funds from that employer’s 401(k) without penalty. Retiring early due to a qualifying disability can also free you from the penalty, as can a few other circumstances, such as financial hardship.
8. Cashing out or borrowing from your plan
Cashing out your 401(k) account when you change jobs or borrowing against it to meet some financial need is another mistake because it stops the distributed money from growing for you. Cashing out shortchanges your future. Don’t think of that sum of money as a windfall you can remove and enjoy. A 401(k) is not meant to be a short-term savings account, but a long-term vehicle to help fund your retirement.
9. Not considering the Roth plan
There are a lot of employers that have been recently offering the Roth version of a workplace retirement plan and it’s a mistake not to investigate this option. With a traditional 401(k), you contribute your income before it’s taxed, thereby reducing your tax bill for the year. When you withdraw the money in retirement, it’s taxed as ordinary income to you. With the Roth 401(k), meanwhile, you contribute post-tax money and thus get no up-front tax break. However, you get a big tax break when you retire: If you follow the rules, you get to take all the money out of the account tax-free.
10. Making the wrong decision when you change jobs
The average baby boomer has changed jobs 12 times during their careers and millennials are expected to continue this trend. With all this job changing, millions of dollars are being “abandoned” in workplace plans every year. You have a few options when you change employers and each one should be considered to make the right choice. You can read about choices and their pros and cons here.
We provide anyone with a workplace retirement plan review at no cost. Whether you need advice on an old plan, current plan, or new plan, we can help. Give us a call at 610-825-3540 or schedule one using the speak to an advisor button on our website.