Most working Americans have heard of a 401(k)
– after all, roughly 55 million Americans
had an active 401(k) as of 2016, with over 555,000 companies offering plans to their employees. According to the Investment Company Institute (ICI), this equated to $5.6 trillion in retirement assets as of September 30, 2018, which represents 19% of all
US retirement assets. 401(k)
s remain enduringly popular for their ease of management, low cost to employers relative to pension funds, and the control (and benefits) they give investors/employees. 401(k)s are typically composed of a mixture of mutual funds, target-date funds, ETFs, and/or individual stocks, and investors can often automatically contribute pre-tax portions of their paycheck to them each month.
The advantages do not end there: 401(k)s provide incentives for savers with pre-tax contributions and tax-deferred earnings. As of 2019, the IRS set a maximum contribution of $19,000 per year (with an additional catch-up contribution limit of $6,000 for people 50 or older) – which employers may match on the employee's behalf. Plans may also include a profit-sharing initiative.
When it becomes available for an investor to make withdrawals after age 59 ½, taxes are theoretically lower for the retiree, since income is generally lower than when the person was working. Additionally, there is no age cap on contributions, as long as someone remains in the workforce. And finally, 401(k)s offer excellent protection from creditors in the event of financial difficulties.
But for all the benefits, 401(k)s aren't perfect retirement vehicles. Plans may offer limited types of investments or be structured sub-optimally; they can be expensive, by virtue of administrative costs; and they are also beholden to mismanagement. Case-in-point: all of the above limitations coalesced in a 2006 lawsuit (settled in 2015) brought by employees of Lockheed Martin, which alleged concealment of over-conservative investments, excessive fees, and other missteps that dampened investor returns. For administrators, we devote a section of this eBook to help you prevent these types of issues and to catch them before they materialize.
Fortunately, a little knowledge goes a long way, and this eBook is designed to help you understand more about YOUR 401(k) plan:
- Is it optimal for you and/or your company?
- Could your 401(k) plan be better?
- Are there shortcomings like high fees or too few investment options that need to be addressed?
- How should you choose investments and diversify your 401(k)?
This eBook will address all of these questions and more while offering you solutions and insights every step of the way.