If you’re trying to retire as soon as possible, your 401(k) may not always be the best place for your retirement savings. Some 401(k) plans are great, but if yours has any of the three problems discussed below, it might be doing you more harm than good.
1. High fees
Your 401(k) charges fees to cover things like record keeping and account management. Some of its fees are annual, while others, like rollover fees, only come up when you use that particular service. Then, there are investment fees, like the expense ratios on mutual funds. These are annual fees that all shareholders must pay. This money comes directly out of your retirement account, so you may not even realize you’re paying anything at all.
Fees may be a flat dollar amount, but more often, they’re a percentage of your assets. If they’re too high (think 1% or more of your assets), that can hamper the growth of your retirement savings. At 1%, you’re paying $1 every year for every $100 you have in your account. If that doesn’t sound like much, consider this: If your 401(k) has $1 million, you’re giving away $10,000 per year. That’s already a huge chunk of change, so you definitely don’t want to give away more than this.
Check your prospectus or ask your 401(k) plan administrator if you’re unsure how much you’re paying in fees right now. If it’s more than 1% of your assets, consider asking your company to offer more-affordable investment options, like index funds. These are mutual funds that passively track a market index, like the S&P 500. Because the companies in these funds change less often than those in actively managed mutual funds, there’s less work for fund managers to do, and that means lower expense ratios for you.
Your company doesn’t have to do what you ask, but it might, particularly if several employees request the change. If it doesn’t, you can always stash your retirement savings in an IRA instead. But you might still be better off leaving your money where it is if your company matches some of your contributions and that match is enough to cover what you’re losing in fees.
2. Bad investment options
Your 401(k) likely includes a few investment options pre-selected by your employer. But these may not suit you for a couple of reasons. They may have higher fees than you want to pay, as described above, or they might not match your risk tolerance.
Typically, you want to invest more aggressively while you’re younger because you may get larger returns this way. Plus, if you do lose money, you have plenty of time to recover before you need to use your savings. As you age, you want to invest more conservatively. That means moving your money to more stable investments, like bonds, to reduce your risk of loss, even though these investments typically don’t offer returns as large.
Investing too aggressively when you’re close to retirement could be a serious problem because if the stock market takes a turn for the worse, you could lose a lot of money on the eve of your retirement, leaving you without enough to cover all your expenses. Investing too conservatively can also be a problem because your investments might not grow quickly enough, and then you will either have to set aside more of your own money for retirement or delay your retirement to give you more time to save.
Target-date funds are one option if you’re not sure whether your current 401(k) investments are suited to you. These funds usually have a year in their name, which represents your target retirement year. The investments in the fund are designed to get more conservative as you age to match your declining risk tolerance. You can also talk to your plan administrator if you’re not sure of the best investments for your retirement savings.
3. A long vesting schedule
Companies that match some of your 401(k) contributions typically have a vesting schedule. This determines when you get to keep employer-contributed funds if you leave your job.
Cliff vesting schedules require you to work for the company for a certain number of years, and then you become vested all at once. If you leave the company before you’re fully vested, you’ll forfeit all of your employer match.
Graded vesting schedules release the funds to you gradually. For example, you might get to keep 20% of your employer-matched funds if you leave the company after one year, 40% after two years, and so on.
Vesting schedules don’t matter if you plan to stay with your company for a long time or if you’ve already worked there for many years. But if you’ve been thinking about a career change, check your vesting schedule first to make sure you won’t cost yourself money. Ask your company’s HR department or your 401(k) plan administrator for details. Sticking it out a few months or a year longer could make a significant difference in your final retirement balance.
If you do decide to leave your company before you’re fully vested, you’ll have to redo your retirement plan to determine how much more you must save per month in order to have enough when you retire.
It doesn’t hurt to run through this list once or twice a year just in case there’s been any changes to your plan. If your employer decides to offer new investment options or your account fees change, that could affect your plans for retirement. Staying on top of these changes is key to keeping your plan on track.