The open enrollment period for company 401(k) plans give employees a chance to assess the amount of their current contribution, rebalance their portfolios or choose other investments for their retirement funds.
Being static is lazy and can prove costly; taking the opportunity to scrutinize your current 401(k) plan is not a significant time investment but can prove a significant effect on your future.
If you are just starting out in your career, be sure to check if there is a minimum contribution amount before the company will start matching those funds.
“Don't leave free money on the table,” said Jamie Hopkins, a retirement professor at the American College of Financial Services in Bryn Mawr, Pa. “Not getting all of your employer's matching contribution is akin to leaving free money on the table.”
Increase the Percentage Taken Out of Paychecks
While some companies will automatically increase your contribution each year in auto escalation programs, others are leaving the decision up to employees, which means too many are not saving enough for retirement.
“You should consider saving at least 10% of salary [for retirement], and 401(k) accounts allow your salary deferrals to be deducted from your taxes this year, which means your investments grow tax deferred,” Hopkins said.
The default salary deferral percentage is 2% to 3% of the employee’s salary at many companies and the amount is “often not nearly enough” for the majority of people, Hopkins said. Instead, companies should double that amount to 5% to 6% so employees have a greater chance to reach their retirement goal.
While automatic enrollment gets many employees to participate in 401(k) plans, a large percentage of people just stick with the initial amount and never increase it. The average starting rate can mislead employees who believe it is “an adequate amount of money to defer when it is in fact far too little,” he said.
Some studies have shown some alarming trends where almost 90% of employees remained with the initial default salary deferral amount and did not increase their deferrals over time, Hopkins said.
Employees save more of their paycheck when their company offers auto escalation as a feature.
“Most plans with auto escalation increase the deferral amount by 1% per year up to a maximum of 10% of the salary deferred,” he said. “Automatic enrollment has not yet realized its full potential.”
Some employees will only contribute the amount to which their company will match it and then “they get stuck there because they get psychologically anchored to the match,” said Rick Mason, president of small/mid corporate and institutional investment markets for retirement at Voya Financial, a N.Y.-based financial institution. A recent Voya study found that 33% of workers said they determined how much to contribute based on their employer’s match.
If the company is only matching 2% to 4%, this can be an issue for employees, because it creates a gap in the amount they will actually need to live on in retirement. A general rule of thumb is that most people should be saving 10% to 15% of their salary, factoring in their own contributions and any match from the employer.
Employees can contribute a maximum of $18,000 to their 401(k) in 2015 and 2016. Those 50 and older can contribute $24,000 annually to a 401(k).