How does your company’s 401k plan stack up?Submitted by Castlebar Asset Management on May 16th, 2013
401k retirement plans are a great way to save for retirement. I am frequently asked how much money my clients should put away for retirement in their 401k and when should they start to use some other type of account. That question is usually specific to the individual’s financial position as well as how their 401k plan stacks up against other investment account options. At a minimum you should contribute enough to get the company match. This is usually between 3% and 5% of your salary and there is no reason to leave free money on the table. The majority of folks I encounter don’t know how to evaluate if their companies plan is a good one or if it stinks.
An easy place to start is to take a look at Brightscope’s 401k Rating Directory. This will give you a snapshot of how your companies 401k compares to others in the industry. It will also tell you how your plan rates in terms of costs. This is a great starting place and will give you enough information to make an informed decision.
If your company is not listed or you want to dig a little deeper here are some other things to look at.
Total cost of your 401k could be anywhere from over to 2% to as little as 0.5%. This fee includes your investment management, plan administration and record keeping. If your plan is charging over 2% you may want to consider asking why your company’s plan is so expensive. If your plan is below 1% then this is a lower cost place to save for retirement. You should receive disclosure document from your HR department to help on this.
Cost of funds and fund options?
When you look at the 401k investment menu of mutual funds that are offered in your plan it is necessary to look at both the breadth and cost of those offered. If your funds charge in excess of 1% (unless they are specialty funds) than you likely have high costs funds in your plan. Judging the breadth of your offering is pretty straight forward. If you are offered an active fund and index or passive fund in each style box then your plan has a good depth of funds.
How much do the target dated funds cost?
Targeted dated funds are like the Ron Popeli Roasterie Cooker, you set it and forget it. It is a one size fits all fund that will gradually reduce risk as you get older. If the target dated fund fees are over 1% they fall into the high cost category. At the end of the day target dated funds are index funds and you should not pay for active management prices for this product.
Most companies have a company match. If they do not then you should evaluate the costs and funds offered with greater scrutiny. With no company match it will probably make better sense to review the benefits offered by other retirement accounts.
If you are seeking 401k advice or have questions about retirement planning send me an email or give me a call at 913-660-0708.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.