How to make 401K work for you; Ignorance is not bliss!

Anyone who has worked in Corporate America, is most likely familiar with the 401(K) or 403(B) retirement plans. The for-Profit and Private Organizations offer the 401K, whereas the Governmental and not-for-Profit Organizations offer the 403B retirement plan. Both the 401K and 403B are retirement savings plans offered by many American employers that have tax advantages to the saver. The employee who signs up for either of these plans depending on where they work agrees to have a percentage of each paycheck paid directly into an investment account such as Fidelity, Vanguard investment and Voya financial, among others.

Any for profit employer such as Coca-Coca or Microsoft offering the 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Then the earnings in a 401k plan accrue on a tax-deferred basis. On the other hand, nonprofits such as American Red Cross, Cato Institute and governmental entities offer plans that can invest in either annuities or mutual funds. Of note, it is rare but possible to have an employer who offers both a 401(K) and a 403(B). In these cases, employees may contribute to both these retirement accounts.

“The maximum contribution level your employer is willing to match should be the bare minimum one should choose to put into their 401K. Not doing so is literally turning down free money. ”

My 401K Plan Experiences

By virtue of having first-hand experiences with the 401K retirement plan, courtesy of the many years l have worked for profit entities in corporate America, allow me to expound more on the 401K plan, including, my encounters with it and lessons learnt.

For starters, when l began working in Corporate America, among all the other employees that were hired at company XYZ I was offered the 401K plan after completion of our 90-day probation period. Partaking in the plan was optional and due to my ignorance of the American corporate employer offerings, l declined from taking the offer. At the time, I was not only younger but a new immigrant, unfamiliar about employee benefits and undergoing some level of culture shock. Moreover, about half of the new hires were all immigrants, meaning we all had foreign accents even if we spoke English and felt ill-at ease about several things at work, virtue of our foreign-ness. Further-more during those employee orientation meetings it was not rocket science to see that there was a level of frustration between all parties concerned. This was due to the “language/accent barrier” in communication, so the majority if not all the foreigners opted out of signing up for the 401K to avoid a lot of misunderstandings and confusion. Truth be told, l didn’t go unscathed, l too let my foreign accent deter me from asking and getting answers that would have benefitted me financially, as a result l missed out on this monetary gain. Darn it!!! Today, l froth at the mouth!!! whenever l recall this missed opportunity.

Well, about one year later l switched jobs, to something closer to my house, that offered a 401k plan, unfortunately the job was not all it was purported to be. By week three I knew this was not the job for me and almost immediately started looking for another job. Alas! my ignorance aided me in not signing up for the 401K yet again, simply because, l had promised myself that l would not be at this new job for more than three months tops. I forgot that looking for a job is a job in itself. In addition, just because I didn’t like my job did not guarantee I would get another one the next day. To my chagrin even though the job helped pay all my bills, it took almost ten months to find another suitable job. Had l known better l would have taken the 401K offered to me for the 10 months l worked there, sadly l once again missed out on wads of cash from my employer. This is sickening when l think about it now!! Who does that!! Ignorance is not bliss……

At the time my premise was (a) I am only going to be here for a short time, so l do not need it. (Isn’t money good whether you are working for one day or 30 years in one place?) (b) I wondered at what would happen to the money l put in the 401K when l left for my next job…ignorance played a part. I didn’t know what questions to ask. A recent survey showed that only Sixty-five percent of eligible workers participate in 401(k) plans. Further revealing that, employee participation rises with income, age, job tenure, and education.

Anyway, I landed my third job, which came with an automatic 401k enrollment from day one of employment. This being my third encounter with the plan, l had by now figured out that the 401K plan must be important, because it was the one benefit besides the health insurance package, that was always offered. Thus, I signed up for it, yippy. However, while signing up was a choice in the right direction, l was not intentional in thinking through my employer's matching contributions and the benefit of contributing more. I also did not understand it to be a part of my compensation and the fact that l chose to put 3% of my income, instead of a higher amount, I was actually missing out on this savings, for not putting more into my retirement account. For example, a 401K matching policy may be 50% of employee contributions, which is up to 6% of total compensation. This meant that if for instance one made $50,000 annually and contributed $3,000 to their 401K, which is 6% of one’s salary, then your employer will contribute an additional $1,500 on your behalf. In this case if you like me, only contributed 3% instead of the 6%, your employer would only match up-to the 3% l contributed. Therefore, not getting the most out of this arrangement. The maximum contribution level your employer is willing to match should be the bare minimum one should choose to put into their 401K. Not doing so is literally turning down free money. This is very similar to turning down a raise…. Have you ever turned down a raise?

Examine your personal situation

Did you know as I briefly mentioned earlier, according to Frankel CFP (2018) in as much as many employers' 401(k) plans have automatic enrollment for new hires, they often witness a low contribution rate such as 2% or 3%. Many workers sadly, simply don't think to opt for a higher percentage like 5% or 6% to gain more even when they get a raise or can afford it. The most common match today is dollar-for-dollar on the first 6 percent of employee deferrals, up from a $0.50 per $1 match in 2011. Luckily, after my three aforementioned 401k mess ups, going onto my fourth, fifth jobs, and so forth, I became sharp as a razor and started making intelligent and strategic choices with my 401K and l am now smiling about it. Though l am tempted to cry over spilt milk, l am happy to say my becoming intentional and proactive in contributing towards my 401k now is a game changer in the right direction. I am aware that there are times the heart is willing to contribute as much as possible but the reality on the ground maybe prohibitive. I have learnt that each one of us should examine one’s personal situation and make savvy choices that will benefit you in the long run. Just a side note for those with Kids, they are not your retirement plan, save or for your own retirement.

Let’s hope that this retirement arrangement discussion will provide you with insightful nuggets to fully utilize in your own retirement planning. Regardless of where you maybe stationed geographically, l encourage each one of you to invest in your retirement. If you are actively working, do your due diligence to learn about the employer benefits available and select those that will serve you best. If you are self-employed look into Solo 401K or SEP IRA retirement plans and start saving and investing. Remember to include your beneficiaries to your plan, inheritance is sweet too, you know! Ignorance is not bliss and not a defense for when you are older with no savings. In addition, since diversification of your portfolio should be your middle name, if you are a novice at investing yet itching to grow your financial capabilities, PeteandPete Investors, is here to the rescue, say no more!! Register for a class today and or a one-on-one session. The prices are pocket friendly too.

By Cyd Nzyoka, PhD

Cyd is an independent researcher, writer & HR consultant. She’s versatile, passionate about investing, taxes, teaching at the tertiary level, corporate training and dissertation coaching. She’s involved in writing on multicultural education, social justice and careers among other topics. You may read her works under IGI Global Publications. Cyd is a graduate of Capella University - School of business and technology. Email thoughts and comments to Cydnz@yahoo.com

Disclaimer

This blog is written for educational and informational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. They author may or may or may not have positions in Financial Instruments discussed in this blog. Future results can be dramatically different from the opinions expressed therein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.