6 Things You Should Know to Make the Most of Employer Sponsored Plans

By Kris Maksimovich, AIF?, CRPC?:

When people hire on with a new company, they often fill out the paperwork and then forget about it. If you neglect to routinely review your retirement account selections, you may be missing out. We put together a list of six things you should know about your employer sponsored plans and how to make the most of them.

When it comes to paying for retirement, the model people generally follow is similar to a three-legged stool:

• Pension
• Social Security
• 401(k) and IRA

Pension Plans

Pension plans have been around since the revolutionary war when soldiers were offered a type of pension for their service. Today, many companies are writing standing options into their plans to allow for a lump-sum payout. If you are offered one, you’ll want to understand your plan’s health, the options available to you, or any limits based upon the time you turned on your pension. This information can be located in your company’s Annual Fund Notice. The information can help you determine if you want to leave the pension obligation with your employer or if you want to move the lump-sum into a less risky alternative, like rolling it over into your IRA.

401(k) Plans

What we know today as 401(k) Plans came into existence in the mid-80s by a fluke. Benefit analyst Ted Benna discovered section 401(k) when digging into the Employee Retirement Income Savings and 1978 Revenue Acts. This pivotal discovery enabled employees to help themselves fund their own retirements on a pre-tax basis. Equally as important is the ability to take advantage of free money when a company matches a certain percent of your contribution.

Roth Accounts. Both a Roth 401(k) and Roth IRA offer tax-free growth on your investment, but they differ in several important ways:

• There are income limitations that may exclude you from receiving a tax deduction when contributing to a Roth IRA. In 2020, a married couple can make up to $206,000 filing jointly and $139,000 for a single filer
• A Roth 401(k) has limitations on the types of penalty free early withdrawals you can make
• The Roth 401(k) has a higher contribution limit than a Roth IRA. In 2020, Roth 401(k) limits you to a $19,500 annual contribution, or a $26,000 catch-up allowance if you are over age 50. The max for the Roth IRA is $6,000, or a $7,000 catch-up allowance if you are over age 50
• There are no required distributions with a Roth IRA. The distributions with a Roth 401(k) must start at age 72
• Taxation on both the Roth 401(k) and IRA accounts happens at the time of contribution. Money put in is taxed at your ordinary income tax rate, then the market runs its course. Upon retirement, distributions will be tax free

Where should I begin?

When clients ask, we generally start the conversation with taking advantage of any free money as part of your company’s matching. Given the size of most companies offering them, the investment expense ratio involved with these plans are as low as any that can be found. That is because companies have a lot of leverage with their combined total assets versus just an individual trying to save. Here are some considerations:

• Does my company offer a 401(k) plan?
• How much can I afford to withhold from my paycheck?
• What is my company’s matching situation?

Six things you should be aware of

Investors should consider a number of things to make the most of their employer sponsored plans:

1. Look for and go with low cost savings options instead of more expensive options
2. Manage the administrative expenses. We often don't realize there can be costs associated with employer sponsored plans
3. Stay invested and keep your cognitive biases in check
4. Stay consistent with your contributions and watch your perception of risk
5. Dollar-cost averaging means ensuring there is an appropriate balance between stocks and bonds
6. Time horizon should always be considered. For example, you don’t want to get stuck in a 40 percent market drawdown when you are two years from retirement

Options you may not have considered

Costs. Keep an eye on the cost of your retirement plans. Your 401(k) plan has administrative fees involved with them. These are charges you should be aware of that go against the performance of the investments within your 401(k).

Distributions. It is possible to roll the money over from a Roth 401(k) to a Roth IRA to avoid having to take the required distributions at age 72, with some specific guidelines. Check with your trusted advisor for details specific to your circumstances.

Business Owners. If you’re a sole practitioner or business owner, you can setup a 401(k) also known as a Solo(k) or Indie(k). Like employer sponsored plans, you have the option of contributing on a pre-tax basis.

Contribute more than the max. For people under age 50 the max for 2020 is $19,500, however there is a forgotten contribution feature when it comes to after tax accounts. The IRS states the total fund contribution maximum is $57,000 if you are under 50 or $63,500 if over the age of 50. This means that you can add additional funds after tax up to that amount using match, profit sharing, stock purchase, and contributions.

This strategy offers protection against some of the surtaxes as a result of the Affordable Care Act, namely the net investment income tax of 3.8 percent for those with adjusted gross income over $250,000. By making contributions to these you can:

• Save more for retirement
• Shelter it in a vehicle that is creditor protected
• Take advantage of deferral components
• Get more flexibility as to when you pull the assets out

Your financial advisor can help you work through the specifics to take advantage of the best option for you.

Tax deduction. If you have ultra-high net worth, or income earnings, Roth's tax-free distribution may be appealing. You’ll have to decide if it will help your tax return this year, or if tax free assets are better off down the line.

Target date funds*. Target date funds manage an allocation of equity and fixed income as a guide path to a targeted retirement. A Target Date Fund is designed to manage your assets more conservatively as you approach your retirement age trigger. This is desirable in managing performance that might be affected by a potential market drawdown as you near your retirement age. It’s imperative that investors understand how these plans work. It's best to contact a trusted advisor to discuss your options.

If you have any questions on the ideas presented here, please feel free to contact me at the number listed below. For deeper insight into employer sponsored plans, catch our podcast on the topic at Your Money Momentum.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. Global Wealth Advisors, 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. (972) 930-1238. [email protected].

*Investments in target date or target retirement funds are subject to the risks of their underlying holdings. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative investments based on its respective target date. The performance of an investment in a target date or target retirement fund is not guaranteed at any time, including on or after the target date, and investors may incur a loss. Target date and target retirement funds are based on an estimated retirement age of approximately 65. Investors who choose to retire earlier or later than the target date may wish to consider a fund with an asset allocation more appropriate to their time horizon and risk tolerance.

?2020 Global Wealth Advisors