When I present employee education sessions, employees often ask me what they should be doing in their 401(k) plan. I tell them:
Make sure you are contributing enough to receive the maximum match. You would be surprised how many employees don't do this. I estimate that in most plans at least 1/3 of all employees do not contribute enough. Employees who do not receive the maximum match are leaving free money on the table. The return on those extra contributions? At least 100%!
Don't trade your account. Employees get scared at market bottoms and overly confident at tops. They need to resist the urge to sell all of their equities when they are scared. Conversely, when equity markets are making new highs, they should not transfer everything into equities. I advise them not to open their account statements during these time periods if they believe that will help them manage their emotions.
Diversify. We all have heard this over and over again from financial planning experts. Many employees like to concentrate their account balances in one or a few funds they feel will perform well or are very safe. Having all their eggs in one basket is not a strategy for success because they are essentially betting on only one economic scenario.
Keep your money in the plan. Employees work hard to save. They scrimp, deny themselves fun, delay purchases, and so on. I ask them not to take loans, withdrawals or cash their 401(k) balances out when they change jobs. Taxes and penalties can reduce what they receive from these distributions by almost 50%. In addition, they are making it impossible to ever retire by spending their retirement savings now.
Keep saving - always. Employees stop saving for a number of reasons: their spouse loses a job, they want to save outside the plan for a home, car, boat, marriage, etc. Many employees, when the equity markets fall, stop saving because they believe it is a bad time to invest in the market. I suggest that they lower their contribution rates if they have to, but never go to 0%. Remember, we all need to average 15% in savings over our entire careers to retire at our current standard of living.
The most important factor is... I am always asked, "What is the most important thing I need to do to build the 401(k) account balance I need?" I ask employees to guess what the answer might be. No one ever gets it. It's not how you allocate your balance, what funds you invest in, whether you market time appropriately, the cost of your investments or how they perform. None of these are the correct answer (although they are all important). It is how much you save. That is such an obvious answer that I always get a number of groans. But it is true. Nothing matters more than the amount that someone saves.
When you construct your next employee education presentation, consider addressing these important topics.
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 firstname.lastname@example.org or 414.828.4015.
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