Wednesday, March 27, 2024

What Questions To Ask Your 401k Provider

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1. What are you paying in fees?

High 401 fees have been stealing the limelight in the media recently, and for good reason! Unfortunately, your provider may make it as difficult for you to actually figure out your fees . Luckily, by knowing a few key terms, youll be able to ask your provider for 2 fee disclosures) the fees that you are paying.

Employee fees: these are the fees that the participant pays, and usually include: the advisory fee, fiduciary fee, and fund fees, among others. Our rule of thumb is employees paying under 0.60% a year is excellent, including the cost of the fund itself. If your employees are paying over 1%, then theyre paying too much.

Employer fees: these are fees that the company pays. This may be a flat fee, a per-participant fee, or both, and can also include fees for statements, administration fees, and set up fees, among others. If youre with a good 401 provider, you will capture economies of scale with this fee as the plan and your company grows so youll pay less as a percent of assets under management or per employee as the plan gets bigger.

HOT TIP*: When was the last time you reviewed the fees you are paying on your 401? If you havent run a price comparison in the past 6 months, nows the time to see if your provider is still competitive. Download the ForUsAll 401 benchmark guide here.*

2. What is your participation rate?

3. What is your fiduciary responsibility?

Common 401 Management Errors To Avoid

Cashing Out Too Soon

The worst thing you can do with an existing IRA is to withdraw funds before retirement. This is the final option for these savings, as they are difficult to replace later in your career. At all costs, you should avoid taking this path.

Investing Too Little to Get Maximum Matching Funds

The IRS has some of the most stringent requirements in terms of what you must do to qualify for their matching funds, but many firms have far more stringent standards. One typical error is not saving enough money, which lowers or eliminates your employers contribution amount.

Before you sign on, double-check the firms withdrawal criteria. This policy should be clearly stated in your strategy if it is not, ask for clarification. If you have made a mistake and do not realize it, act swiftly to correct it.

Taking 401 Loans

In a difficult job climate, it can be nearly as bad to take loans on your 401 as simply cashing it out and reinvesting elsewhere. The restrictions on what you are allowed to withdraw funds for can be exacting. In addition to the amount of principal removed from your account, there is an interest rate that you will be responsible for paying back.

Investing Too Aggressively

The majority of 401 plan losses in 2008 were caused by aggressive investing. When several plans fell at the same time, some investors focused on unsecured debt or junk bonds, which made them fall even more.

Rolling Over Into IRA Savings

Dont Leave Your Retirement Funds Just Lying Around

You might think 401 rollovers are less common than they actually are. Like dusty boxes in an attic, many people have an employer-sponsored plan from a former job, such as a 401, lying around.

Its not uncommon to speak with someone who has worked for several different companies over the last 10 years, which is indicative of a fast-paced corporate world and its tumultuous tendency to show more favor to the bottom line than to the people who drive it.

If youve participated in a company-sponsored plan and your employment ends, whether voluntarily or not, you likely have a plan sitting in investment limbo. If you do, you need to choose what to do with it and a rollover is one option.

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Three Questions You Need To Ask Your 401 Provider

As a business owner, its your job to find the right 401 provider to fit your companys needs. How do you start that process? Here are three questions to ask a prospective 401 provider.

How would this provider help your employees?

Will they be able to retire on time? Numerous employees dont take advantage of their 401 options because they are not educated about them. Will this provider offer financial training so that employees are better prepared to manage their 401s? Unfortunately, many employees lack the financial literacy to manage their own portfolios. Your 401 provider should be prepared to support them in this process.

Will the provider act as a trustee?

Business owners have a significant obligation with regard to 401s. The trustee must make decisions about investments and ensure compliance with ERISA and IRS regulations. This is worth discussing with your prospective provider, as there may be an option for the provider to be a plan fiduciary.

How much will it cost?

You have to look closely for hidden costs, because employers can be shocked at the total figures. Be sure to take into consideration management rates and provider fees. Fortunately, the Department of Labor implemented new regulations in 2012 that require service providers to disclose all costs in detail for each plan. This should make it easier to compare prospective providers and what they offer.

For more information, please read the full article here.

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Does The Company Match My Contributions

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This is perhaps the most important question to ask because a company match can significantly increase the value of your retirement account. Employers typically match a percentage of your contribution. If you make $50,000 a year, contribute 5% of your salary , and your company matches 50% of your contribution, this adds $1,250 to your account. The employer contribution may be limited by the plan or by your annual contribution limit as set by the Internal Revenue Service .

Try to contribute the maximum of your company’s match, assuming it has one. But you may not want to go above that amount. Many small companies have high-cost 401 plans, says Michael Zhuang, principal of MZ Capital Management in Bethesda, MD. In this case, it is actually not worth it to contribute more to the plan since whatever you save in tax dollars you pay in hidden fees and then some.

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Question : When Do I Become Vested

Any money you contribute is always 100% vested, and its yours to keep.

Vesting is your legal right to keep what your employer contributed. And each employer has their own vesting requirements.

Some require you to stay employed for a specific amount of time before the money the employer contributed to your match is yours. This is known as cliff vesting.

Others let you keep employer contributions as soon as they are made.

Many companies have graded vesting. For example, 20% might be vested after your first year working, 40% vested the second year, etc., until you are fully vested.

No matter what, once you become fully vested, the money is yours to keep.

So, should you change jobs after you are fully vested, you dont have to return part or all of the money your company matched.

Reinvesting In Stable Funds

The word stable is subjective when the market is constantly changing. We can make assumptions about what will remain stable during a recession by observing past performance or current trends.

Many investors consider bonds to be a very safe haven during economic downturns. This does not include certificates of deposits or the enormous amount of commercial paper that many individuals have become acquainted with for the first time in 2008.

In contrast to stocks, the other type of security, bondholders lend money rather than invest it. As a result, bankruptcy laws favor lenders rather than part-owners . In the event of bankruptcy, you will be able to liquidate your assets before other creditors.

Although some experts believed that dividends in the most stable firms might be secure for 401 investments because of natural economic growth, the severity of the current financial crisis has made this market significantly riskier than it has been in a long time, with few firms capable of generating dividend profits to share in either stock offerings or cash payments.

One needs to be sure they do not trade stability for actually falling behind the rate of inflation, which is a losing proposition as far as the relative value of that money. In early 2008, when the inflation rate was around 3%, many 401 funds had returns at the same rate. After administrative costs and other fees, many people were losing money on their plans but were unaware because they had not liquidated them yet.

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What Are My Investment Options Other Than Target Date Funds

Many companies 401 plans use target date funds as their default option, automatically enrolling employees in them.

They can do this thanks to the Pension Protection Act of 2016, which allows employers to direct plan participants assets into a target date fund and not be liable should the employee not select an investment.

According to Marketwatch, About 70% of U.S. companies automatically enroll employees into 401-type plans, and more than 86% of these firms now direct peoples money by default into target-date funds .¹

Target date, or lifestyle, funds are supposed to automatically adjust account allocations throughout life.

Investors are grouped solely based on their expected retirement date. This means target date funds do not take into consideration an investors

  • Retirement goals and objectives

The reality is that target date funds will often underperform in good markets and do a poor job of managing downside risk during tough markets.

A recent article indicated that, on average, target date funds invested 75% in common equity, generating average losses of over 30% during the 2008 financial crisis.

Investors planning to retire in 2010 suffered significant losses because 2010 target date funds increased their common equity exposure in 2007

According to Morningstar analyst Jeffrey Holt in March 2018,In the long run, the biggest risk in target-date funds is that they wont meet investor expectations for avoiding losses

What Does It Mean To Say A 401k Cannot Discriminate

Fisher Investments Answers Your Most Common 401k Questions

According to the IRS, federal regulations ensure that 401k plan contributions made by and for ordinary employees are comparable to those made for highly compensated employees, such as managers or officers. Some differences in plan rules can exist from employer to employer, but once the rules are set, any exceptions or changes must apply to all full-time employees.

A 401k is set up for the sole benefit of the participants of the plan, Nickles said. Therefore, if you are a full-time employee, you are eligible to participate and benefit from any company 401k. As with medical benefits, there may be a short time three months for example before you can participate, but all full-time employees are eligible. The company cannot pick and choose who participates, he said.

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Can I Rollover A Balance From A Previous 401 And If So How

For many people, staying at the same company from the start of their career until they retire is a thing of the past, but they still want to plan for retirement as they work. If you have had a 401 at previous companies, you may want to roll it over into your new 401 to maximize your funds and simplify the number of accounts you have open. Most 401s have a method for accepting rollover funds as well as for rolling their funds over into another account. You may need to do some research about the process and ensure it’s an option for you.

Seven Questions To Ask Your Retirement Advisory Team

1) First and foremost, is your advisor a 3 Fiduciary?Did you know that Plan Sponsors/Trustees, whether it is the CEOs, CFO, Presidents and/or any other plan fiduciaries, have Personal Liability for the assets in their companies retirement plan? Wellspring Financial Partners, a unique ERISA 3 Plan Investment Manager , can partner with your company to reduce your liability exposure and investment responsibility! 2) Do they tailor Retirement Spending Reports for every employee? Reaching out to your employees with easy-to-understand language and offering high quality material, shows you care about their financial success. 3) Do they offer a comprehensive financial plan for every employee?Wellspring believes its important to guide and motivate your employees using comprehensiveplanning. We charge a nominal fee of $160 for this service, which is typically valued at $2,200. 4) Do they provide special education sessions?Not just education about their 401K plan, but education for their whole financial picture. 5) Do they provide documentation that protects you, the Trustee?Wellspring includes an exclusive third party scorecard on plan investments that marks the best the industry can offer. 7) Does your Advisor provide a Fee Audit Report?Do they pledge to renegotiate provider pricing so your plan always stays on the front end of fiduciary practice and stays competitive?

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Where Are The Funds Invested

One reason that you might want to contribute less than the maximum amount to your 401 plan is the performance of the retirement fund itself. Investing in a retirement fund means trusting institutional investors to put your money where it will do the best.

But the companys fund might not be the best available. Its results might be weaker than the market average. If the company has chosen a poor retirement fund then you might be better off keeping the money and investing it somewhere else.

In practice, though, thats going to be difficult to justify. The loss of tax advantages and any matching contribution is likely to outweigh any advantage gained by putting your money in a higher-performing fund. But you should still know how well your fund is performing and track its performance if only to know how much you can expect to receive after you retire.

What Are The 401k Fees

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All 401k plans charge asset-based fees that impact your investment return and your long-term financial goals. These fees can be hard to calculate because you do not pay them directly your plan subtracts them before your return is reported. Ask your employer about your plans fees, as the company should be able to give you a full explanation. You can also regularly review your account statement to find out how much you actually paid for various services.

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How Do 401 Plan Work

Out of the several benefits that 401 plans offer, one of the main benefits that it offers is tax savings. In the case of 401 plans, there are two options that an employee can choose from as both come with their distinct tax advantages. These are:

  • Traditional 401 – In this type of plan, the contributions of the employee would be deducted from their gross income. This means that the money will come from the employees payroll before income taxes have been deducted. Thus, the employees taxable income will be reduced by the total amount of contributions he or she makes in a year. This can then be reported as a tax deduction for the tax year. In this case, no taxes would be levied on the contributed earnings until the employee withdraws the money, usually during his or her retirement.
  • Roth 401 – In this case, the employees contributions are deducted from their after-tax income. Thus, there is no tax deduction in the year of the contribution. However, when the money is withdrawn, usually during the retirement period of the employee, no additional taxes are levied on the contribution amount or even on the investment earnings.

However, Roth 401 is not offered by all employers. If the employer does offer it, then the employee can choose one from both the options, or he, or she can even design a mix of both up to the annual limits on their tax-deductible contributions.

What Does Your Ideal Client Look Like

Just like you, right? Thats the answer you are likely to get. You should find out what your 401k advisers book of business looks like. How many clients does your adviser have with your number of plan participants out of their total book of business? If you arent the dominant client size, you will likely be inadequately served. And by that I mean you wont get exactly what you need, but something that might be close. With the large number of 401k investment advisers out there, you dont need to settle for someone who doesnt specialize in plans your size. Generally, it is not hard to find the right adviser.

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How Many Years Have You Been A 401k Investment Adviser

We are at the end of a nine-year bull market in U.S. stocks. That means there are a lot of 401k advisors who have entered this business over the past nine years who have never experienced sustained down markets. As someone who has worked with retirement plans for more than 30 years, I can tell you that bear markets arent much fun for anyone. Your 401k advisor may decide to step away from this business during the next bear market many will. Make sure you work with a 401k investment adviser who has weathered more than one storm, since tough markets are when you need an investment adviser the most.

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