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What Every Investor Should Know About Planning And Saving For Retirement
In today’s vlog, I’m going to talk about Four 401K Myths That Are Simply Just Not True.
Myth number one is that your 401K plan doesn’t cost you anything. This one’s always a little bit surprising to me whenever I see these surveys that come up from time to time, in a recent survey by AARP, seven out of ten workers actually thought that they weren’t paying anything on their 401K plan. So, obviously this is just not true. All 401K plans have some fees attached to them, but one good thing is that in July of 2012, the Department of Labor passed a ruling that makes 401K plan sponsors disclose their fees at least once a quarter to all of their plan participants, so if you haven’t seen one of these fee disclosure statements, be sure to check that out. It should be with your monthly statement or you should be able to find it on the web site that you go to to log into your account. One thing I wanted to note here about fees is that fees are significantly higher on medium and smaller sized plans. In fact, according to Brightscope.com, which is a leading independent retirement plan company, they said on a large plan, one that has over $100 million or more in assets, you routinely will see these fees less than 1%, and some of the biggest plans within that group will have fees that are less than a half a percent, but when we get down to these smaller plans, it’s not uncommon at all to see plans having fees of one and a half to 2% and even some plans that have fees over 2% per year, so if you’re working for one of these medium or smaller size companies, it may be more important for you to pay attention to that fee disclosure statement and really know how much it is you’re paying in 401K costs.
Myth number two is that the 401K plan is the best place for you to be investing your money. So, I’ll be the first one to say the 401K plan definitely does have some advantages. I like the fact that money comes right out of your paycheck automatically, goes right into that investment account before you even have a chance to spend it or do anything with it. There’s really nice high contribution limits on 401K plans. If you’re under 50, for 2017 it’s $18,000 a year that you can put in, and if you’re 50 years old or older, it goes up to $24,000 a year, so really nice contribution limits. A lot of companies are matching the money that you put into that, at least up to a certain level, so that’s another great advantage, but, you know, a couple of disadvantages and why your 401K plan may not always be the best place for you to invest.
Number one is fees. We just talked about that, and especially if you’re working for one of those companies that has higher 401K fees, it may not be the best option for you. Another thing that I think pretty much all 401K plans have, is limited investment choices, so even some of the best plans out there may only have a couple of dozen, maybe three dozen different investment options for you as to where you can put your money, and then the last thing is that your money may be locked up, so we all know that 401K plans have the 59 and a half rule where you can’t take your money out before that age without a penalty, but beyond that, if you decide that one day you don’t like your 401K plan anymore, you probably can’t really move it. That money’s going to be tied up there until you either separate service from the company or you turn 59 and a half, so your money may be locked up in the 401K plan as another disadvantage.
Thee are a couple alternatives that I really like. One of them is the IRA or the Roth IRA account, and again, there’s going to be more limitations to that, but you can control your fees a little bit better with these types of accounts, you can move it from firm to firm if you choose to do that, and you’re also going to have more investment options with a Roth IRA account.
Myth number three is that your 401K plan alone will be enough for you to retire. I think this is something that a lot of people fall into, and the 401K plan really becomes their only or at least their primary source of saving money for retirement. They think that just by putting money into their 401K plan, it’s going to be enough for them to achieve all of their retirement goals. Well, it may be depending on how much you’re contributing and how long you’ve been able to put that money in, but I think for a lot of people, that 401K plan alone may fall a little bit short of hitting some of those financial goals. In fact, there was a really nice article that came out last fall, and it was the inventor of the 401K plan, who says that he believes he created a monster, and this was on MarketWatch.com, and what he basically talked about is he said, you know, he created the 401K plan as an additional way for people to save money for their retirement, but what it also did, is it started a trend where more and more companies started replacing their pension plans, their traditional pension, with these 401K plans, and obviously now today in 2017 the number of companies that offer pension plans to their employees is significantly less than what it was back in the early ’80s when the 401K plan came out. So keep that in mind that your 401K plan alone may not be enough for you to hit those retirement goals.
The last myth is that your 401K plan is guaranteed. So obviously, this is not true either. Your 401K plan assets are not guaranteed. One of the more popular investment options in 401K plans and a trend that more and more 401K plans are going to are these target date funds, and in particular, I think a lot of people may believe that those target date funds have some type of a guarantee attached to them, so the SEC, the Securities and Exchange Commission, did a survey on this last year and they said that out of the people pulled, 30% believe that there was a guarantee attached to their target date fund, which I think is a very higher number. 15% of them said that it depends on the fund, meaning that some of them may have a guarantee and some of them may not, and then 20% just didn’t know. So when you look at that, over half of the people polled in that SEC survey believe that they either had a guarantee or it depended or they didn’t know if it had a guarantee, I think that’s a very high number, and hopefully all of you now know that your 401K plan doesn’t have any guarantees attached to it. This money is still invested in the financial markets and stocks and bonds and a variety of different securities that are going to go up and down depending on how the markets do and what’s going on in the economy.
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