So, you have access to a 401(k) at work. That's great news
-- right?
Well, the answer depends on whether the plan is a good
one. If yours isn't, it's still worth investing enough to get any
available employer match. But if fees are high or investment choices are
limited, you may want to invest only up to the match and put the rest of your
hard-earned money into other
tax-advantaged accounts.
Of course, it's hard to tell whether your 401(k) is worth
investing in. One way to determine if your plan is a good deal or a bad one is
to compare it to others. A 2018
report from BrightScope provides information to make that comparison.
And key findings from that report are used below to make the process
easier.
Employer contributions to your 401(k)
Employer contributions to a 401(k) plan are one of the most
important features. When an employer contributes, the company gives you free
money, and you should take advantage of it.
Employer contributions to 401(k)s are very common. But if
your employer doesn't contribute, there's probably nothing you can do, and your
plan is significantly worse than one where free funding is
available.
If you work for a larger company, there's a very good
chance your employer will contribute. More than 90% of plans with at least $10
million in invested assets received employer contributions, and around
one-third of total contributions into large plans come from employers.
However, even in smaller plans with between $1 million to
$10 million in investible assets, 81.4% of employers still made contributions.
These smaller employers contributed about 24% of total invested funds.
If your employer doesn't contribute anything, you'll have
to assess other features of your 401(k) to determine if it's worth putting any
money in.
Types of employer contributions
It doesn't just matter whether your employer contributes
money -- it also matters how contributions are determined.
Most often, employer contributions come in the form of a
match. This means you put money into the account and your employer matches a
certain percentage, such as 50% of your contributions up to 4% of your salary.
If you get a match, you'll want to make absolutely sure you contribute enough
to claim the maximum.
However, some employers make automatic contributions, regardless
of whether employees invest or not.
In 52.8% of large plans offering employer
contributions, employers used a simple matching formula like the one
described above, where a percentage of your contributions are matched. However,
in 11% of large plans, automatic contributions were made.
Employees in midsize plans were more likely to get money no
matter what, as automatic contributions were made in around 22% of plans
with $50 million to $100 million in invested assets and 29.4% of plans with
$100 million to $250 million.
Small plans, on the other hand, were least likely to have
automatic employer contributions, with just 6% of these plans receiving
contributions not tied to employee investments.
Investment options
A good 401(k) plan offers plenty of choices for where to
put money so you aren't too restricted in the investments you can make.
On average, larger 401(k) plans offered 29 different
investment options, and there was little variation in the number of investment
choices in large versus small plans.
What's more, investment options should provide the chance
to build a diversified portfolio, as nearly all plans offered domestic and
international equity funds and bond funds, as well as at least one target-date
fund.
Unfortunately, not all plans provided a wide variety of
assets to invest in. For example, 10% of plans offered 18 or fewer investment
options.
If your 401(k) offers far fewer than 29 options, you may be
too restricted in where to put your money. You may want to consider investing
only the amount needed to earn an employer match and putting money into an IRA
where you can invest in almost anything you like.
Plan fees
Paying
investment fees eats into your returns in a major way, which is why it
is so important to know the costs of investing in your 401(k).
Depending upon your plan and investment options, there
may be lots of different fees, including mutual fund fees, management fees, and
other investment expenses. BrightScope measured them all to get a total plan cost,
which fortunately has been going down since 2009.
The average total plan cost in the 2018 report, which
covered plans in 2015, was 0.88% of assets. This is down from a 1.02% fee in
2009. While this is good news, total plan costs vary dramatically between
the cheapest and costliest. For example, around 10% of plans had total costs of
0.39%, while 10% had costs of 1.38% or higher.
Larger plans tend to have lower total plan costs than
smaller ones because those who work for larger employers benefit from the
fact that fixed costs are spread over a wider pool of investors.
In 401(k)s with between $1 million to $10 million in
invested assets, average total plan costs were 1.17%, whereas total fees for
plans with $100 million to $250 million invested were just 0.52%. And in plans
with a total value topping $1 billion, total costs were around 0.30% of plan
assets.
If your plan is at the costlier end, this is another
situation where investing only up to the match and putting the remainder of
your funds in an IRA could be the best solution.
Investing in a 401(k) is often a smart move
If your 401(k) plan has an employer match, or your employer
contributes to it, the choice isn't hard: Open your 401(k) and take advantage
of the free money your employer provides for retirement.
If your plan isn't great and you don't get a match, an IRA
may be a better option for your money. The key is to put as much as you can
into some type of tax-advantaged retirement account so you can have the money
you need in retirement.
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here for the original article from The Motley Fool