With the economy on the upswing, companies are beginning to tweak their 401K’s for a host of reasons. No matter the reason for the change, now is the time for investors to reevaluate their 401K plans and decide what is best for them. This year, IBM made an odd adjustment and decided to make their 401K matches on December 31. The significance is two-fold; workers, who leave during the year except for in retirement, forfeit their contribution match for that year. Further, any interest that may have been accrued during the year is foregone.
IBM is an outlier in the 401K changes that have occurred, but according to Erica Reed, “although trustees owe plan participants a fiduciary duty, many do not look out for the best interests of the employees.”
Some companies match 401K contributions. Most that match will give 50 cents on the dollar. Smaller fractions of companies match more, with the second largest group being the full match. This factor is not as straightforward as it would seem however. As is the case with IBM, it is important to know when and how often the company will match as well. These factors contribute to the interest an investment can make in a year.
Range and Quality of Investment Options
The Wall Street Journal recommends that an investor seek to use five to ten asset classes, “including large- and small- cap U.S. stocks, at least one international-stock fund, Treasuries, and intermediate-term bond fund, and a stable-value fund or money market fund.” “Unfortunately, says Erica Reed, many of the plans do not provide the best investment alternatives and frequently are in the bottom quintile of performers.”
The Wall Street Journal Online’s article, “How Good is Your Company’s 401K?” says that 70% of workers do not think they are currently paying fees to contribute to their 401K’s. The truth is that the fees make up a $60 billion per year industry. In the same article, Mike Alfred said, “[t]otal expenses for larger plans should be well under 1%, preferably 0.5% to 0.75%.” It’s important to know what kind of fees an investment is charging so that an investor can accurately decide what plan is best. One useful tool is the AARP 401K fee calculator. This free tool can be found on their website at aarp.org/401kfees. Fees act as a drag on investment performance says Erica Reed and over the long-term can have a significant negative impact on retirement.”
A Target-date fund uses a specifically estimated year in which the investor expects to retire. Their equity investments decrease as they approach that year and these vehicles are usually heavily made of fixed-income securities. They are frequently, however, very expensive options.
Erica Reed is an associate attorney at Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor, P.A. She is a member of the Business Torts Department of the firm. Her practice focuses primarily upon representing individuals and entities in the areas of securities litigation and arbitration, as well as complex business and antitrust litigation.