Why employers, employees should revisit their 401(k)
As the year gets into full swing, now is a great time for plan sponsors and participants to reevaluate the goals of their retirement plans.
Many people make New Year’s resolutions around finances, but it is easy to overlook what is happening in your retirement savings account, experts say. The good news? Plan sponsors can help employees make it a priority with a variety of tips and tricks.
As Catherine Golladay, Charles Schwab’s senior vice president for 401(k) participant services and administration, points out, the U.S. is coming off of one of the strongest stock market rallies in recent memory. Portfolio balances have gone up but the asset allocation may now be out of alignment with a person’s risk tolerance.
“While your 401(k) is a long-term investment and you shouldn’t make drastic changes every time there is volatility in the market, the new year may be a good time to rebalance so that your investments reflect your risk tolerance and other preferences,” she says. “Also make sure you’re not overloaded on company stock: as a general rule, company stock should make up no more than 20% of your 401(k) portfolio.”
The beginning of the year is a great time for employees to revisit old 401(k) plans they may have trailing behind them from a long career, she says. Now is the time for employees to look at those accounts and decide if they want to leave them where they are at, consolidate them into a current employer’s plan or move them into an IRA.
“If [participants] choose to leave it alone, make sure your investment options reflect your current preferences and risk profile,” Golladay says.
Employees also should check all of their accounts to make sure their beneficiary designations are correct as well, she adds. People who experienced major life changes last year, such as getting married, divorced or having a baby, want to make sure their 401(k) beneficiary designations are in line with their current situation.
Map out a financial plan
Carla Dearing, founder and CEO of SUM180, an online financial wellness product, says that many people make New Year’s resolutions that are kept for about two weeks and then thrust aside as other life events get in the way. She recommends that instead of making lists, people should take a moment to assess where they are financially and map a plan forward.
The most important thing is to “get your arms around your expenses or know your number. Just set a goal to know your monthly expense number,” Dearing says. “The beauty is that when you dive in and know it you automatically have gotten ideas on how to save.”
The problem with setting beginning-of-the-year financial goals is that sometimes people bite off more than they can chew. A good rule of thumb is to build up an emergency fund made up of six months’ worth of expenses. Because that may seem too extreme and hard to reach for many people, Dearing suggests building up a two-month emergency fund and then moving up from there.
The same thing can be said of personal debt. She recommends that people set a goal to make a double payment on their debt every other month in the year to slowly start digging out of the problem. If people get overwhelmed, they won’t do anything, she says.
Sometimes getting a handle on personal finances is the only way to better assess how one can put money aside for the future.
“The best thing you can do is take your 401(k) contribution up a tick,” Dearing says. “A lot of people are a little scared to do that because they really aren’t sure if they took a little more out of their paycheck they can handle it, but nowadays, in most people’s plans, you can tick that number up and down with some regularity.” One percent isn’t too much to ask, but 2% would be better, she adds.
Issuing company challenges
Employers can take this time to help employees get a handle on their finances and retirement savings by doing something as simple as issuing challenges — for example, having employees know their monthly expense number by the end of January, or try and save up one month’s worth of expenses by March 1.
“Create a little momentum around people planning and thinking about their situation and where they might be able to save. That would make a big difference,” she says. “I do think it is hard for companies because they don’t know people’s personal situations.” Most people struggle with finances in some respect, either short-term emergency fund, long-term saving for unexpected medical expenses or being able to put more away in their retirement savings.
“You are in safe territory if you focus on savings challenges,” she says. Many people struggle with credit card debt, so that’s another challenge that would be good to address in a company setting.
Trisha Brambley, CEO or Retirement Playbook, Inc., says that plan sponsors should really take this time to investigate automatic features for their workplace retirement plans. Most people are doing automatic enrollment for new hires, but many plan sponsors don’t take that extra step to go back and auto enroll current employees who neglected or declined to participate in the company retirement plan when they started working for the company.
Automatic escalation is another great way to get employees saving more for their future. Most plans automatically up a participant’s contribution by 1 to 2% per year to reach a maximum contribution of 10 to 15%.
“One of the reasons employers are even more serious about helping employees in these matters is that they are starting to realize that if employees don’t have enough at retirement, their fallback strategy is to stay working longer,” Brambley says. That can be expensive. Older workers typically make higher wages and older people have more health issues, which can cost the company more in health benefits.
She also encourages employees to rollover old 401(k) plans into their current 401(k) plan. She believes employers should do a better job of focusing on rollovers when new employees start because it helps employees become better prepared for retirement. They aren’t leaving funds behind in another account they may forget about later and they have continuity of savings.
If employees don’t know what to do with their old 401(k) plans, they may cash out, which is the last thing people should do if they want to build a nest egg for their future.
Picking the right partner
An underrated way to help both employers and employees is by picking the right partners for a workplace 401(k) plan, Brambley says. There is a bigger focus on fees within plans now, but she stresses that employers can get a lot more bang for their buck if they shop their plans and plan services.
Both record keepers and plan advisers have stepped up in terms of what they can offer to participants, she says.
According to a recent Schwab survey, only 44% of 401(k) participants feel very or extremely confident making 401(k) investment decisions on their own; when they have the help of a financial professional that number jumps to 74%.
Employers should consider offering professional advice to all of their retirement plan participants, Golladay says.
“We do know that for individuals who take advantage of advice, it gives them peace of mind and a higher confidence level. Going into the New Year, isn’t that a good thing?” she asks.
She encourages plan participants to take a look to see if their plan offers professional advice. If it does, they should take advantage of it.
“That combined with low cost funds, what a powerful combination,” Golladay says.
Many companies offer target-date funds as their qualified default investment alternative. Schwab makes available a managed account, which takes that level of personalization far beyond the TDF, Golladay says. It looks at everything from a participant’s age, marital status and how much they are saving to which state they live in and how much they have saved.
She also encourages plan sponsors to reexamine their plan designs to make better use of automatic features and also keep an eye on their investment menus.