5 Key Moves That Can Help Boost Your 401(k) Savings
With the markets sliding, now's a good time to take a fresh look at your retirement account
For anyone saving in a 401(k), it’s been a rough few months. With both stocks and bonds falling in value, your account balance has likely taken a hit.
If you’re a younger investor, don’t overreact. You may not have experienced a prolonged down market before, but they’re inevitable. And on the bright side, they give you the opportunity to buy more shares at lower prices.
But if you’re feeling anxious, whatever your age, this is a good time to review your 401(k) strategy. That’s especially important if you haven’t changed the amount you contribute since you signed up for the plan or were automatically enrolled.
1. Set Your Own Savings Rate
You may not be aware of the precise dollar amount you contribute to your plan. That’s because about 70 percent of plans use automatic enrollment, according to a recent survey by Callan, an investment consulting firm. Workers are signed up automatically unless they opt out.
Being auto-enrolled is a good thing. But not all employers use these programs, or they may restrict it to new hires. So make sure you are actually signed up for your plan, because automating your savings is the best way to make sure it really happens, says Tom Fredrickson, a certified financial planner with CGN Advisors in Brooklyn, N.Y.
If you’re auto-enrolled, don’t just go along with the contribution rate set by your plan, which may be less than 5 percent of pay. Adding auto-escalation, if it’s offered, can help.
Most workers should aim to save 15 percent of pay each year, which can include your employer matching contribution, Ward says. If you can’t save that much right now, try to contribute enough to get a full match and gradually boost your savings rate each year.
For those with cash to spare, the maximum dollar amount you can save in a 401(k) is $20,500 this year, up from $19,500 in 2021. Those 50 and older can stash away another $6,500, which is unchanged from last year.
2. Stash Some Money in a Roth 401(k)
About 75 percent of plans now offer a Roth 401(k), along with a regular pretax account. With a Roth, you don’t get an upfront tax break, but your money grows tax-free. Unlike a Roth IRA, there is no income limit to a Roth 401(k). And you can contribute to both pretax and Roth accounts. Unfortunately, few people opt for a Roth 401(k), when it’s offered.
That’s probably a mistake. A Roth 401(k) is an especially good deal for younger people, who are most likely to be in a lower tax bracket now than in the future, says Fredrickson.
A Roth 401(k) also offers advantages for middle-aged and older savers who typically have most of their savings in pretax accounts. When that money is withdrawn at retirement, it will be taxed, which may trigger higher Medicare premiums and Social Security taxes. That’s when having tax-free savings to tap can be particularly valuable, Fredrickson says.
3. Move On From a Target-Date Fund
According to Callan, 92 percent of 401(k) plans use target-date funds as the default investment. These all-in-one portfolios provide instant diversification and an asset mix that shifts to become more conservative as you near retirement.
Target-date funds can be a great starting portfolio, but as your finances grow complex, and especially as you near retirement, a single fund may no longer be the best choice. “You may have other financial goals, such as college tuition and a spouse’s finances to coordinate,” Fredrickson says.
If you’ve reached that stage, consider choosing your own 401(k) portfolio—your plan may offer online tools that can help you do this. Or consider consulting a financial adviser about developing an investing strategy that fits your household’s needs and help you navigate today’s shaky markets.
4. Pay Attention to Costs
In recent years plan sponsors have focused on reducing fees, Callan’s data show, with more than half of employers saying they have reviewed the costs of their plans, or are likely to do so.
All of which is great, because the less you pay in fees, the more investment returns you can keep. But that may not happen if you’re opting for high-cost investment options. So take a close look at the expenses charged by your funds—they will be detailed on your 401(k) statement or the plan’s website.
If you’re paying, say, 1 percent for a fund, look for a cheaper alternative on the plan menu. The typical 401(k) stock fund charges 0.5 percent, and index options may cost just 0.05 percent.
5. Check the Retirement Withdrawal Options
Typically, 401(k) investors roll out of their plans into IRAs when they retire or leave the company. But employers are starting to encourage retirees to stay put, in part because larger plans can better control costs. Some 76 percent of employers have a policy for retaining retiree assets, according to Callan, with more offering flexibility in withdrawals and encouraging rollovers from other plans.
Most plans (85 percent) have options for retirees seeking to develop a retirement income strategy. Seven out of 10 401(k)s offer partial withdrawal or installment plan distributions, and 59 percent provide a withdrawal or drawdown calculator. Only 7 percent offer an annuity option.
So before you reach your retirement date, find out the rules for retirement withdrawals at your 401(k).
"You may find it convenient to keep your money in the plan, especially if your costs are low," says Ward. "But if you don’t have the flexibility you need, that may be a reason to roll over to an IRA."
