Put all the news aside — are you saving enough for retirement?
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It goes without saying that saving for retirement should be a top priority in your budget, but only a small percentage of Americans actually reach their realistic retirement goal. The result is that many are delaying retirement or adjusting retirement plans to make up for the deficiency. If your company offers a 401(k) plan, you should be taking full advantage of the potential benefits to amplify your savings. Here are five steps you can take to ensure you are maximizing these benefits.

Defer as much as possible annually

The Internal Revenue Service (IRS) sets the maximum deferral limits for 401(k) plans at $18,000 annually, with the exception that those above the age of 50 can defer an additional $6,000 annually as a catch-up contribution. But don’t wait until you’re close to retirement to take an aggressive approach to saving — compound interest can greatly increase the amount you save over time.

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In some cases if you are considered a highly compensated employee (by IRS definition) in a 401(k), your deferrals may be limited further due to nondiscrimination testing within your plan. Many plans offer a safe harbor company match or nonelective contribution that allow highly compensated employees to defer the maximum due, as the nondiscrimination testing is a deemed pass.

 

Know your vesting schedule

While the funds you deposit on your own belong to you, the funds deposited by your employer are vested based on years of service. Years of service are accumulated as simple as elapsed time (anniversary date) or hours worked each year (such as 1,000), so you should be aware of your vesting schedule. If you are considering leaving your job and don’t want to raise any red flags with HR, you can contact your service provider’s call center or review your plan’s quarterly participant statement.

If you are a participant with safe harbor company match or nonelective, it is probable these monies are already 100 percent vested. The most common vesting schedule for profit sharing monies is a six-year graded schedule, in which you are are vested 20 percent after two years and every year afterwards the vesting is increased by an additional 20 percent. But some plans have a three-year cliff vesting schedule, in which participants are zero percent vested until they reach three years of service and become 100 percent vested.

Don’t leave money on the table

If your employer matches deferrals, you could be getting free money that does not come out of your pocket and increases your overall retirement savings. Review your summary plan description, or check with your human resource department to find out if there is an employer match.

In some cases, your company may be making a profit sharing contribution or a company match that is contingent upon working the last day of the plan year. Again, if you are considering leaving your company, leaving in December as opposed to early January may cost you a profit sharing contribution. You can also use this information as a bargaining chip with your new employer; let them know what you could be losing if you leave your company before the end of the plan year.

Be an informed investor

Reviewing your quarterly statement is important for two reasons. First, you can catch mistakes (however rare) made by the recordkeeping service provider. Secondly, you can verify whether all your deferral deposits are being made in seven business days, as required by law for plans under 100 participants, or ‘as soon as possible’  for plans over 100 participants. If the deposits are late, you are entitled to additional earnings.

Those who have a 401(k) plan should also understand the fees they are being charged. Remember, there may be multiple fees, including recordkeeping and plan compliance fees, investment advisory fees, and investment fees from mutual or ETF funds.

The statutes that govern 401(k) plans mandate your plan sponsor detail these fees on your quarterly statement. Should the fees appear to be high, it may be worth your time to ask the company to provide a fee comparison from their most recent due diligence.

Use retirement planning tools

Check with your plan sponsor or recordkeeping service provider to find out what retirement planning tools they offer. In some cases, they may offer retirement planning software to help you make investment decisions, help you determine how much you should be saving or give you projections on how long your money will last after retirement. Some plans even offer access to a free investment and retirement planning advice from a financial advisor. If your plan offers any of these features, take advantage of them, as they can save you money from consulting with another advisor.

Whether you are starting your first job and will be involved in a company 401(k) plan for the first time, or you have been investing in a 401(k) plan for years, make sure you know your plan's rules and be certain you are taking advantage of every benefit offered.

 

Keith Clark is a co-founder of DWC ERISA Consultants, a firm that provides third-party plan administration, compliance, and consulting services for qualified retirement plans, helping businesses and investment advisors navigate today's complex regulatory environment.


The views expressed by contributors are their own and are not the views of The Hill.