You ever have that feeling?
Where you wonder if you’re making the right decisions with your 401k? Asking yourself questions like: Am I taking too much risk? Maybe I’m not taking enough? Should I be contributing to my Roth 401k?
These decisions are complex and require analysis to make the best decision. In fact a recent study, showed that people who have help making decisions in a 401k plan are better off than those that don’t.
3.3% better per year according to data from 723,000 participants across 14 different 401k plans.
Given this gap, it’s important to assure you are aware of all the intricacies when making decisions in your 401k. So after reviewing hundreds of 401k plans, we have complied the top 6 biggest missed opportunities people make within their 401k plans.
Assuming a Rollover is Your Best Option
When leaving an employer, sometimes leaving the plan where it’s currently held is the best option. Often, we see quality investment choices in 401k accounts with cheaper expenses than you could access outside of the 401k. Additionally, in the current low-interest rate environment, cash/stable value choices within 401k’s can be a good choice for some of your fixed income investments. It’s also important to determine, if your employer will be depositing any other contributions to your plan after you leave/retire. It can be a major hassle if you move your plan before the contribution is made.
Waiting Until the Last Minute
Several companies are now enforcing mandatory rollover dates once you retire or change jobs. Situations like this are best handled with analysis of your entire situation. There could be additional decision-making involved as it relates to social security taxability, other pension decisions, or favorable investment choices in your current plan. Decisions made in isolation could cost you more in the long run.
Paying a Higher Tax Rate Now
It’s amazing the amount of higher income clients that are not contributing the max to their 401k accounts. By missing this opportunity, they are potentially paying higher tax rates now on their income verses later. Especially for individuals and couples in the 25% Federal tax bracket or higher (excluding state tax). This could be a major benefit down the road that you are skipping now. Why wouldn’t you want to shield funds from being taxed now that could be taxed lower in retirement? There could also be extra taxes you are paying on other investment income (3.8% surtax) if above $200k/$250k AGI levels by not deferring more in your 401k now.
Converting in the Wrong Year
This is one of the most costly mistakes we see. With more plans offering opportunities to contribute to your Roth 401k, participants are considering more Roth conversions. The appeal of getting more money in to tax-free accounts is tempting. But many don’t realize it could cost tens of thousands in unnecessary taxes if done in a high income year. This decision should factor in your potential future tax brackets. Without proper tax planning from a professional, a large tax bill could await next April.
Missing Out on Extra Income
Can you believe 1 out of 4 people miss out on a portion of their employer match? Some companies are extra generous when it comes to matching employee’s contributions in 401k accounts, with some in the double digit percentages of your salary annually. Make sure you determine the percentage your employer will “match” your contributions and make a point to contribute at least this much.
Lack of a Disciplined Financial Plan
The verdict is in and it shouldn’t surprise you. Fidelity found that 77% of people feel they lack time and skill to select appropriate investments in their 401k. This is demonstrated in studies from Morningstar and Vanguard showing the effect of behavioral mistakes on the average investor’s results. This is because most investors don’t have a disciplined plan to guide them. Without targets and regular reviews, an investor is left to haphazard emotional decision-making.
Seek out a fiduciary financial advisor to discuss how to optimize your 401k within an effective investment strategy. This is the best way we’ve found to help you stay on track to meet your targets and accomplish your goals long-term.