5 Retirement Plan Benefits You’re Probably Overlooking

One thing that I’ve noticed when speaking to HR executives and other employees about their benefits is that many valuable retirement plan benefits aren’t being taken advantage of. These benefits are part of your compensation so not utilizing them is like not taking your whole paycheck. Here are 5 in particular:

Auto-escalation

By allowing you to gradually increase your contributions, this is one of the most powerful tools that can help you save more and build wealth over time. For example, a 25-yr old with a $40k income, contributing 6% ($2,400) a year to their retirement plan, receiving a 3% match, and earning an average annualized return of 6% per year would end up with just under $600k at age 65. However, if they had that contribution increase just 1% a year until it eventually hits 20%, they would have over $1 million at age 65. The best part is that they probably won’t even notice the small contribution increases in their paycheck, which may be less than their cost-of-living adjustments.

Target Date Funds

Many employees have no idea which funds to invest in. If you want to keep it simple, see if your retirement plan has target date options. These funds are fully diversified to be “one stop shops” that gradually become more conservative as you get closer to the target date so all you have to do is pick the fund with the date closest to your expected retirement, invest everything in it, and set it and forget it. Instead, too many people purchase multiple target date funds or supplement it with other funds, which just serves to complicate things and can throw the balance of the fund off. (Lest you think having one target date fund is TOO simple, I can tell you that many people I know that work in employee benefits or in financial services invest in just one target date fund, including many high level executives with large account balances.)

No Cost Investment Advice

If you’re looking for more personalized advice, many retirement plans offer online investment advice programs at no additional cost. (You pay for it through the plan’s fees whether you use it or not so you might as well use it.) Unlike target date funds, these programs customize your investments based on your specific risk tolerance and may even pick investments to complement your investments outside the plan and let you know if you’re saving enough for retirement. You just have to take a few minutes to use it and update it at least once a year as you may want to invest more conservatively as you get closer to retirement. (This would probably be the best option for most people.)

Self-Directed Brokerage Account

If you’re a more advanced investor who prefers to choose your own investments, see if your plan has a self-directed brokerage account window that gives you a much wider choice of investments. This way you’re not limited to the funds in your particular plan. (This would be my preferred option.)

After-Tax Contributions

If you’ve maxed out your pre-tax and/or Roth limits ($18,000 for 2015 plus another $6,000 if you’re over age 50), you may be able to contribute more after-tax. If your plan lets you withdraw these after-tax contributions while still working there, this can be particularly beneficial in a couple of ways. One option would be to invest it in a stable value fund (if available) and use it as a high-interest savings account. Even after a 10% tax penalty on the earnings if you’re under age 59 ½, you’ll still probably come out ahead compared to a much lower yielding savings account. The other option would be to roll the after-tax contributions into a Roth IRA to grow tax-free after age 59 ½.

Whether you’re struggling to save more or hitting your regular contribution limits and whether you’re a novice or advanced investor, your retirement plan may have useful features that you’re probably not taking advantage of. There’s a good chance that you may not even have known about them at all. Which one(s) will you start using?

 

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