The New Age of the 401K
Even without employer matches, employees should contribute, experts say
Gone are the days when companies offered generous employer contributions to their employees’ 401(k) plans. In the 1980s, Forbes magazine matched employee contributions dollar for dollar. Employees retired early with hefty nest eggs, thanks to the generosity of Editor-in-Chief Malcolm Forbes and his family.
Employer contributions have declined dramatically over the years. Despite receiving no 401(k) contributions from her employer, Beverly Shore, 60, a Boston property manager, has been socking it away since 2000. “I contribute 35 percent of my paycheck. You get used to it, and you don’t miss the money,” says Shore, who’s single. “I only have so many working years left, and plan to put away as much as I can to fund my retirement.” When she earned a raise recently, she boosted her contribution by $75 a week.
Shore chose a “lifestyle” fund that bases risk tolerance and asset diversification on a specific retirement year. “We call them the happy meals of 401(k) plans,” says Jeff Fishman, founder of JSF Financial, a Los Angeles-based wealth management firm with a stable of entertainment industry clients. “In today’s market, these plans are good for people who don’t want the responsibility of picking and choosing, because they offer automatic asset allocation.”
Trends among 401(k) plans, in addition to skimpier employer contributions, include federally mandated lower plan management fees and greater disclosure of inner workings by plan managers. Fishman advises clients to check and update beneficiary designations. “Many people haven’t checked them in years since they started contributing to their 401(k) plan,” he explains.
Nevin Adams, director of Education and External Relations at Washington, D.C.- based Employee Benefit Research Institute and director of the American Savings Education Council, has sound advice. “People make flawed assumptions about retirement that hurt them when deciding on 401(k) contributions. They assume they will spend less during retirement than pre retirement.” He points out spending often increases after age 70 due to costly healthcare and long-term care expenditures that result in a flawed retirement strategy.
“With a 401(k) it’s never too late to put money in,” Adams continues. “When you have a shift in spending like a mortgage payoff or you’re done with college tuition, shift that monthly payment into your 401(k),” Nevin says. The annual 2012-2013 contribution limit allowed by the IRS is $17,500 up to age 50. In addition, people 50 and older can utilize the “catch-up” contribution limit of $5,500 for a total contribution of $23,000. However, some employers do limit employee contributions.
Jim Casey, CEO of Palm Spring-based Integrated Wealth Management, says that no matter where the stock market is, “People should continue contributing to their 401(k). The long-term goal of the plan has nothing to do with where you believe the financial markets are going. If you are fearful, then use the plan’s money market option.”