Distilled from a 25-year career spent counseling retirement plan sponsors and participants, following are the most common misperceptions I have heard about 401(k) retirement plans:
1. I only need to contribute up to the maximum company match. Many plan participants believe they only need to make contributions up to the maximum percentage that their company matches. They think that is the message the company is sending them. In most plans that works out to be only 6% in employee contributions. Many studies have indicated that participants need to average at least 15% in annual account contributions each year.
2. It is ok to take a loan or withdrawal. I have had many participants tell me that, "...if this were a bad thing why would the company let me do it?" Account leakage via loans and withdrawals is a major reason many participants never save enough for retirement.
3. Rolling a 401(k) balance into an IRA is a good idea. There are many investment advisers trying to convince participants this is a good thing to do. However, higher fees, lack of free investment advice, use of higher cost investment options and many other reasons make this a poor idea for most participants.
4. Actively trading my 401(k) account makes sense. Trying to time the market, following newsletters or a traders advice is rarely a winning strategy.
5. Indexing is always superior to active management. Although indexing ensures a low cost portfolio, it doesn't guarantee superior performance or proper diversification. Access to commodity, real estate, mutli-sector bond funds and many other diversifiers is sacrificed by many pure indexing strategies. Also, in many market environments, active management is a better option.
6. Target date funds are not good investments. Most experts who say that target date funds are not good investments are not comparing them to a participant's allocations prior to investing in target date funds. Target date funds offer proper age based diversification. Many investors, before investing in target date funds, may have invested in only one or a few funds that were inappropriate risks for their age.
7. Money market funds are good investments. These funds have been guaranteed money losers for the past few years because they have not kept pace with inflation. Unless a participant is five or fewer years away from retirement or has difficulty taking on even a small amount of risk, these funds are below average investments.
8. My 401(k) account is a good way to save for college, a first home, etc. For the same reasons as taking a loan or withdrawal, a retirement plan is not a good place to save for college, a first home, or anything other than retirement.
Consider addressing these misperceptions in your next 401(k) employee education session.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). Mr. Lawton was named as a Top 100 Retirement Plan Adviser by PLANADVISER and a Top 300 Retirement Plan Adviser by 401(k) Wire. Mr. Lawton may be contacted at email@example.com 414.828.4015.
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