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As a 401 (k) Plan Consultant for over 30 years, I have worked with some of the world's most prestigious companies including Apple, AT & T, IBM, John Deere, Northern Trust and Northwestern Mutual. And, I am always surprised by the simple – but important – misconceptions that many people have about their 401 (k) plans.
Here are the most common misconceptions I encounter.
1. I need to contribute only up to the maximum number of companies
Many plan members feel that their employer sends them a message indicating the amount of their contribution. As a result, they contribute only up to the corresponding percentage of contribution.
In most plans, this represents only 6% of employee contributions. However several studies indicate that participants must add at least 15% each year to their 401 (k) account.
2. It is acceptable to take a participant loan
Many participants told me, "If it was a bad thing, why would the company let me do it?"
Leaking accounts with defaulted loans is one of the reasons why some of us are not able to save enough for retirement. Many people, when they change jobs, choose not to repay their existing 401 (k) plan loans because they do not have the cash to repay their loans.
In addition, take a 401 (k) loan is a horrible investment strategy. Generally, if you can take out a loan elsewhere, you should do it.
3. Putting a 401 (k) account in an IRA is a good idea.
Many investment advisors are working hard to convince everyone that it is a good thing to do.
However, higher fees, the lack of free investment advice, the use of more expensive investment options, the lack of availability of stable value and investment options in guaranteed funds, and many other factors wrong idea for most of us.
The Ministry of Labor agrees, as shown by its recent automatic portability proposal.
If you can, insert balances from your previous 401 (k) accounts and IRA accounts into your current employer's 401 (k) plan. This is a much more profitable option.
4. My 401 (k) account is a great way to save for college, first home, and so on.
When 401 (k) plans were first introduced to employees several decades ago, HR staff helped persuade skeptical employees to contribute by saying that they could be used to save money. many different things. They should not be.
It's a bad idea to use a 401 (k) plan to save for an initial down payment on a home or to finance a home purchase. Similarly, a 401 (k) plan is not the best place to save for a child's education – 529 shots work a lot better.
Plus, your 401 (k) package is not the best place to save for the purchase of a car, boat or luxury vacation. If you want to enjoy a quality of life in retirement, use your 401 (k) pension plan to save only for retirement.
5. I should stop making 401 (k) contributions when the stock market drops
Many participants have said, "Bob, why should I invest my money in the stock market when it goes down? I'm just going to lose money!" When the market is down or in value, stocks are on sale. This is the best time to invest in the market!
Stay true to your contribution plan in all types of markets. Stopping and starting to make contributions is not a good way to build the balance you will need to retire.
The main challenge for participants who stop contributing to the face is when to resume their contributions. Most expect the stock market to recover. As a result, they end up buying when the cost of the shares is high – this is not a good investment strategy.
6. Active trading in my 401 (k) account will allow me to maximize my account balance.
Studies have always demonstrated that trying to sync the market (this includes following newsletters or tips from a trader) is rarely a winning strategy. Systematically adopting an asset allocation strategy adapted to your age and your ability to take risks is the best approach.
Nobody can predict what the market will do in the future. Please do not believe that you or anyone else can. Do not try to "trade" your account. All the people I knew who did this exchanged their account.
7. Indexing is always superior to active management
While index investments provide an inexpensive portfolio, this does not guarantee superior performance or diversification. Access to commodity funds, real estate and international funds is often sacrificed by many pure indexing strategies. A mixed Active and passive investments often prove to be the best investment strategy for most of us.
8. Target date funds are not good investments
Most experts who say that target date funds are not good investments do not compare them to the allocations of most participants before investing in target date funds.
Target date funds offer appropriate diversification based on age. Before investing in target date funds, many of us may have only invested in a fund or in some funds that were not risk-adjusted for our age. Studies show that the average number of funds used by 401 (k) participants is between three and four. This is not usually enough to ensure good diversification.
9. Money market funds are good investments
These funds have been guaranteed as losers for several years because they have not kept pace with inflation.
Unless you retire in at least five years or have difficulty taking a risk, however small, these funds are below average investments. Instead, try investing in stable value investment options or guaranteed funds.
10. I can contribute less because I'm going to make my investments work harder
Many participants said, "Bob, I do not have to contribute as much as the others, because I'm going to make my investments do more work." Most participants believe that the majority of their final account balance will come from their 401 (k) account income.
However, studies show that the determining factor in the amount of participants in retirement is their contribution rather than their remuneration.
11. A 401 (k) plan balance in millions of dollars is enough to retire
That should be enough, but for many of us it will not be.
Many of us hope to retire things that we only dream of during our years of work. Others will suffer unexpected health care costs that can quickly deplete their savings. Many of us will live much longer than we ever thought. As a result, many experts estimate that a 401 (k) $ 1 million plan balance will not be enough.
I hope these suggestions will help you become a better investor in 401 (k) plans.
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As a 401 (k) Plan Consultant for over 30 years, I have worked with some of the world's most prestigious companies including Apple, AT & T, IBM, John Deere, Northern Trust and Northwestern Mutual. And, I am always surprised by the simple – but important – misconceptions that many people have about their 401 (k) plans.
Here are the most common misconceptions I encounter.
1. I need to contribute only up to the maximum number of companies
Many plan members feel that their employer sends them a message indicating the amount of their contribution. As a result, they contribute only up to the corresponding percentage of contribution.
In most plans, this represents only 6% of employee contributions. However several studies indicate that participants must add at least 15% each year to their 401 (k) account.
2. It is acceptable to take a participant loan
Many participants told me, "If it was a bad thing, why would the company let me do it?"
Leaking accounts with defaulted loans is one of the reasons why some of us are not able to save enough for retirement. Many people, when they change jobs, choose not to repay their existing 401 (k) plan loans because they do not have the cash to repay their loans.
In addition, take a 401 (k) loan is a horrible investment strategy. Generally, if you can take out a loan elsewhere, you should do it.
3. Putting a 401 (k) account in an IRA is a good idea.
Many investment advisors are working hard to convince everyone that it is a good thing to do.
However, higher fees, the lack of free investment advice, the use of more expensive investment options, the lack of availability of stable value and investment options in guaranteed funds, and many other factors wrong idea for most of us.
The Ministry of Labor agrees, as shown by its recent automatic portability proposal.
If you can, insert balances from your previous 401 (k) accounts and IRA accounts into your current employer's 401 (k) plan. This is a much more profitable option.
4. My 401 (k) account is a great way to save for college, first home, and so on.
When 401 (k) plans were first introduced to employees several decades ago, HR staff helped persuade skeptical employees to contribute by saying that they could be used to save money. many different things. They should not be.
It's a bad idea to use a 401 (k) plan to save for an initial down payment on a home or to finance a home purchase. Similarly, a 401 (k) plan is not the best place to save for a child's education – 529 shots work a lot better.
Plus, your 401 (k) package is not the best place to save for the purchase of a car, boat or luxury vacation. If you want to enjoy a quality of life in retirement, use your 401 (k) pension plan to save only for retirement.
5. I should stop making 401 (k) contributions when the stock market drops
Many participants have said, "Bob, why should I invest my money in the stock market when it goes down? I'm just going to lose money!" When the market is down or in value, stocks are on sale. This is the best time to invest in the market!
Stay true to your contribution plan in all types of markets. Stopping and starting to make contributions is not a good way to build the balance you will need to retire.
The main challenge for participants who stop contributing to the face is when to resume their contributions. Most expect the stock market to recover. As a result, they end up buying when the cost of the shares is high – this is not a good investment strategy.
6. Active trading in my 401 (k) account will allow me to maximize my account balance.
Studies have always demonstrated that trying to sync the market (this includes following newsletters or tips from a trader) is rarely a winning strategy. Systematically adopting an asset allocation strategy adapted to your age and your ability to take risks is the best approach.
Nobody can predict what the market will do in the future. Please do not believe that you or anyone else can. Do not try to "trade" your account. All the people I knew who did this exchanged their account.
7. Indexing is always superior to active management
While index investments provide an inexpensive portfolio, this does not guarantee superior performance or diversification. Access to commodity funds, real estate and international funds is often sacrificed by many pure indexing strategies. A mixed Active and passive investments often prove to be the best investment strategy for most of us.
8. Target date funds are not good investments
Most experts who say that target date funds are not good investments do not compare them to the allocations of most participants before investing in target date funds.
Target date funds offer appropriate diversification based on age. Before investing in target date funds, many of us may have only invested in a fund or in some funds that were not risk-adjusted for our age. Studies show that the average number of funds used by 401 (k) participants is between three and four. This is not usually enough to ensure good diversification.
9. Money market funds are good investments
These funds have been guaranteed as losers for several years because they have not kept pace with inflation.
Unless you retire in at least five years or have difficulty taking a risk, however small, these funds are below average investments. Instead, try investing in stable value investment options or guaranteed funds.
10. I can contribute less because I'm going to make my investments work harder
Many participants said, "Bob, I do not have to contribute as much as the others, because I'm going to make my investments do more work." Most participants believe that the majority of their final account balance will come from their 401 (k) account income.
However, studies show that the determining factor in the amount of participants in retirement is their contribution rather than their remuneration.
11. A 401 (k) plan balance in millions of dollars is enough to retire
That should be enough, but for many of us it will not be.
Many of us hope to retire things that we only dream of during our years of work. Others will suffer unexpected health care costs that can quickly deplete their savings. Many of us will live much longer than we ever thought. As a result, many experts estimate that a 401 (k) $ 1 million plan balance will not be enough.
I hope these suggestions will help you become a better investor in 401 (k) plans.
