Getting the Most from Your 401(k)
03/05/2012 6:30 am EST
Advisor and financial planner Chad Parks specializes in retirement plans for small businesses. Today, he tells MoneyShow.com about some of the gaps in retirement funding, and steps individuals can take to shore up their accounts.
Kate Stalter: I am on the phone today with Chad Parks, CEO of Online 401(k). Chad, the 401(k) topic is something that is relevant, obviously, to most individual investors. So I wanted to start out today with some of the common mistakes and pitfalls that you see.
Chad Parks: The first one that most people don’t understand about their 401(k) is that it is a tax-deferred savings vehicle, and that first and foremost, saving money and getting an immediate match from the government is really what it is all about.
A secondary option is, of course: What do you invest it in? So we encourage people to separate the two decisions: Do you want to save for your retirement? Most people answer that in the affirmative. And how much do you want to save for your retirement? Then go ahead and work out a plan that works for you, and don’t forget about that immediate tax savings.
Then after you made that decision and feel comfortable with it, then go ahead and start looking at whether or not you think you should invest into the options that are available to you in your plan.
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Kate Stalter: I recognize that your clients are the businesses who are offering the 401(k)s. So in that framework, for an individual who is looking at his or her choices, what are some of the best practices?
Chad Parks: We do work with what we would call small businesses, generally companies with 50 employees or fewer. What we see is a big misunderstanding in that small business space about what it is to offer a retirement plan to their employees.
The big misperception from an employer standpoint is generally that a company must do a match, which is a true cost to the company, a true cost to payroll. What we try to educate our clients on is the fact that offering a retirement plan is a benefit to your employees. It’s truly that, just a benefit; it allows them to be able to save their own money and invest it. It doesn’t require any company match.
The good part of that being optional is that if the company decides that they are having a good year, and they do decide they want to be able to do a match for their employees, then they can always turn that feature on.
What we also find is that for the small business owners, the perception is that they can’t benefit from the plan themselves. That is not the case. There are certain ways buy a plan called Safe Harbor that would allow the business owner and/or the spouse, if they work there, or any of the other kind of partners in the firm to maximize their own retirement savings, while offering the benefit to their employees.
Kate Stalter: Do you see frequently, Chad, where perhaps the employees don’t even recognize some of the options available to them in their plan?
Chad Parks: Yes. I overhead this on the street once, where someone was actually talking to some of their friends about whether or they were going to participate in their 401(k) plan. The person said, “No I don’t think I am, because there is no match.”
I thought that was really short-sighted, because the match is always a great thing if a company does do a match. It is a pretty powerful way for you to increase your savings. But, of course, you do have to participate to get it.
I think really understand that for every $100 that you put in, you really only need to come up with $70, because the government is going to provide that other $30 in the form of immediate tax savings. Then if the company does do some sort of matching program, then that is even better. So in some cases, you get $150 in savings for only putting up $70 of your own money.
So in my book, that is a pretty good return right there. Regardless of what you invested in, you have just doubled your money, just by simply going ahead and putting it into the plan. So that is one of the big things we see.
I think we live in a society where we all want instant gratification; it is just sort of the way we are. There is really no instant gratification, other than that immediate tax savings for saving for your future, for saving for your retirement, because it is such a long-term thing. Many of us don’t really have a good idea of how to even conceptualize what that means, so that I think a real challenge for people.
There are several things happening in the industry. The challenge is, do we have enough people covered by these retirement plans at their place of work? For larger companies, the answer is yes. Most companies do offer some sort of a plan.
In the smaller market, we have data that shows 92% of businesses between two to 20 employees don’t offer any type of retirement plan. So that is a big problem for those people. Then the challenge is: OK, if you do have a plan available, to get you to participate. There has been a big awareness campaign done within the organizations, and there are enrollment meetings and things like that.
So the enrollment process has improved over time, and we are starting to see probably 60% to 70% participation at the plan level. So that is good.
Then the next thing is: Are people saving enough? There has been a lot of focus on educating, and tools and calculators to say, “Here is what you are going to need in retirement, so let’s make sure that you are saving enough for yourself and that you invested properly for the risk level that you need, or that you should be comfortable with.”
Now where we are going, as more people are starting to retire, is the focus is about lifetime income, making sure that you don’t outlive your money, making sure that you have a way of having a good solid plan in place to draw down that retirement plan. Because that was the whole point in the first place. You have to accumulate it in order to then be able to take it out.
So that is a really tricky issue for people, particularly as health care improves and people are living longer. It is really hard to predict how many years of retirement you are going to have and what are your expenses going to be, and how you work all that out. So there is a lot of focus on the industry amount and the government, in fact, on trying to ensure that people have lifetime income from their retirement savings
Kate Stalter: So what would you say to a person who is nearing retirement, and perhaps their 401(k) is underfunded? What should that person be doing?
Chad Parks: That is a tricky one, no doubt. I’ll answer it indirectly: We have what we are calling a looming retirement crisis in this country. For that very reason that you just said—that most people’s 401(k) plans are underfunded, and not going to be a big enough nest egg for them when they do start drawing it down—it is going to be a tricky situation.
There are different surveys done and different respondents will say, “Well I will just continue to work longer, or I will wait and take Social Security later.” Those are, I guess, plausible scenarios in most cases, but the thing that I think most people don’t take into consideration is that they make an assumption that that job will be there for them, or that they can go and get another job somewhere else.
I read one statistic the other day that said 10,000 baby boomers a day are retiring now. That is going to change the macroeconomic profile of our country of supply and demand, and the investment market—which is the stock market—which thrives on that.
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I think that no one has done a really good job at sort of outlining, overall, what kind of effect this is going to have as all these people start moving into retirement and start to draw down their 401(k) plans. Funded or underfunded, that is just one small part of the potential problem.
So for an individual, what can they do? I think the best thing really is to seek some professional advice. Sit down with preferably a certified financial planner.
Those folks, CFPs are unbiased generally, and they have to go through a rigorous certification process. So they put your best interests first; they are not trying to necessarily sell product. And just really come up with a plan and look at what the next 10, 20, or 30 years look like for you.
Make sure that you have a budget in mind, and then make sure that you have the resources to do that. Of course, allow for some unknowns, because those things always occur.
When I was a financial planner myself, what I used to counsel my clients on, was that it’s OK not to necessarily know what ten years, 20 years, or 30 years is going to look like, but at least have some idea, some goal in mind.
That every year you do a little check-in with yourself and/or your professional that you are working with, and you sit down and you say: Has anything changed? Have your desires changed? Has the reality changed? Has the market changed? Has your family changed? What do we want to do for the next 12 months to get you on a path?
It is OK that your 10-, 20-, or 30-year-old goal might still be a little elusive. But at least if you take it in bite-sized pieces every 12 months, that is generally what we find gives people a little bit more comfort and piece of mind.
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