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Amidst the market volatility are you over checking or avoiding your 401k? Tom Zgainer, CEO of America's Best 401k explains what consumers can do to protect their 401ks. Tom, what can consumers do?
- Well the first thing is I think you need to be interested in your money. You know, for most Americans, we don't have residual or passive income. We're reliant upon for our retirement savings the dollars we get from our employers. Paycheck to paycheck over the course of many years. So we have to be interested in the fact that this, our work career, is gonna lead to an accumulation of those savings. So the first I think is being interested in saving in the first place. We only have to look to our mom and dad or our grandparents so see what kind of life are they living now as they get older? Is that the kind of life we wanna live? So your younger self is gonna be far more taking care of your older self if you take little actions early. So understanding your money. And one of the things to understand certainly is any money that's invested, what are the cost of those investments? Because fees really will erode your savings along the way. Whether it's a 401k plan chosen by your employer, or perhaps an individual retirement account you established on your own. You wanna be cognizant of the mathematical effect of fees over time. The last thing you wanna do is leave 25 to 30 percent of your nest egg on the table along the way for people you don't even know to put in their pockets. So these are the kinds of things we try to teach people early on, the mathematical consequences. And certainly if you can keep your fees well below one percent, which anyone can do, on an individual basis or in a 401k plan, you're gonna be able to accumulate a heck of a lot more dollars. The stat we like to use, a difference in one percent in fees over the course of time can have the affect of taking away 10 years of retirement savings. We can't afford to give those moneys away. We need it, that's the biggest thing.
- So we're seeing so much market volatility, how is that affecting the 401ks?
- It depends on what month or week you look at it, right? In December, for example, it was a crushing month. One of the worst months ever in the history of the market in December. We took a ton of phone calls from people, what should I do? Should I cash out? Should I eliminate my 401k? Take a distribution from it? Well here we are since Christmas Eve to today, the markets been up, I think close to 2000 points. So where we thought the sky was falling one month, it's decidedly different the next, your 401k plan is for long periods of investing. If you're in your 20s and 30s, there's gonna be differences in the market that are gonna be ugly at times, but it always bounces back. So you wanna have time be on your favor, the primary thing is to just keep saving. Don't look at your balances every day, or your statements every month. Because it might not make you happy that particular moment in time. But if you look at it a month later, now you're completely different. The key is just steady as you go over long periods of time, and steadily increase the amount you're putting away each year, which is an important point, because a lot of folks in 401k plans, from the time they're first eligible, they never change the percentage taken out of their pay, two, three years, four years down the road. Now you're falling behind inflation. So maybe you wanna give your 401k a raise each year. Like we have New Year's resolutions, if I've been putting away two or three percent, can I stretch it to five or six? So these little things we do along the way are gonna lead to more accumulation over time.
- Let's backtrack a little bit. Because we talked a lot about what to do with 401ks, now I'm wondering, if a consumer doesn't know what a 401k is, what is it? How can you break it down for them?
- Yes, real simply is it's an employer sponsored retirement plan. This year, if you're under age 50, you can put aside 19,000 dollars from your pay with an extra 6,000 dollars if you're over age 50. So basically gives you a vehicle to save either pre tax, or with the Roth. Now what a lot of people don't know about the Roth 401k is it doesn't have income limitations. The Roth IRA does. As you have certain limits of income, your ability to put money into a Roth IRA gets reduced, but not in a 401k. You can still put your whole 19,000 dollars in post tax. That gives people who are doing a little analysis of reduction in tax liability or tax efficiency. If I'm younger, and I'm extensively making a lower amount annually than I will in my 30s and 40s, I might want to let my 401k accumulate in the Roth so it's all taxation is complete. When I look at my balance, that's my money. Other folks wanna reduce their tax liability, but then you have to realize when you take the money out at age 59 and a half or greater, now you have federal tax and state taxes if the state you're in has state tax. So your balance isn't really your balance. So we have to look at those kinds of things depending on your own personal situation really.
- How can people protect their 401ks?
- The issue with 401ks is we are dependent upon the choice of providers our employer chooses. Now our employers are well intentioned. But they've got his or her heads down running the business and the kind of look at the 401k plan as a checkbox item, it's not. We try to have you realize it's a real thing, it's a living thing, it's your money most importantly. So the protection really becomes, did your employer make the best possible choice? Unfortunately, a lot of small business owners are told they don't qualify for low cost investments, or a really low cost plan. That's really not true. It's a matter of the provider saying we can't make enough money off of your plan, so we're going to charge more. Any company, whether it's five employees starting a 401k plan for the first time, or one with 550 million in it, can have the lowest possible investments, again well under one percent, in our case just 0.60 percent total investment related fees. We can't control the market, the things that happen in the market day to day seems for no reason in particular why it happens, we have to live with it, we can control the fees we're paying on our 401k plan, which will certainly erode it over time. So if you're a participant, for example, we've created a website called showmethefees.com. Where any participant, and hundreds each week send us the fee disclosure for their 401k plan, we do an analysis for them. If your plan is great we'll tell you. Sadly it's a two or three out of every 200 we can say that. For the rest, we give them some empirical evidence that they can share with their employer. So now their employer who again wasn't paying attention to a review of their 401k plan often has the largest balance, and therefore the most to lose, now is given evidence by an employee for something that can change for the good of everybody in the plan. So you can protect it by sending your fee disclosure to a company like for us, and have a look at it, get a diagnosis. In medical terms they call it the ideology, what's the underlying cause of something going on. We wanna do a diagnosis. And if there's something that should occur to make it better you wanna do that right away, just like you would do for your own health.
- So how can a bear market affect 401ks in the longer term?
- Well like we saw in December for example, and there's a lot of talk are we really in a bear market? We see our balances going down. That's concerning for most, if you're in your late 50s or early 60s, and you are soon to have a retirement, you don't want a bear market to occur. So what you need to be cognizant about is what are the investment options in your 401k plan? Are there options that would allow you to shift from a higher risk to a much lower conservative risk because why you wanna maintain what you accumulated over time. If you're a young person in your 20s or early 30s and a bear market comes along, they always leave and another bull comes along so you have time on your side, so don't fret it so much. Continue to save, in fact maybe pour more money into your 401k in a bear market because you're buying low.
- Okay, how often should the average person check up on their 401ks? I feel like this is a very, everyone has an opinion on this, so I'm curious in your expertise, what do you think?
- Well it's almost like the weather, is it gonna be sunny or cold today? Is it gonna be warm or gloomy? Oh my goodness is that gonna affect my mood? I know, I'm from Arizona, I wanna see blue sky and sun all the time, right? But sometimes it's not. If we look at our 401k statements day to day to day it's up, it's down, it's up and down, you're focusing on the wrong thing. Let time be it's course, take it's course. But certainly a once or twice a year rebalance, or review, to make sure you're on course. The markets change, so for example you were invested in four different funds at 25% each, and the market changes, you become out of balance a little bit. So to get yourself on course, you either wanna have a financial fiduciary in your life, or hopefully your provider gives you resources to help you rebalance your portfolio at least twice a year. That's the best thing. Along with annually for sure, or every chance you get, increase yourself. Give your 401k a raise, a one, two, three percent or so whenever you can afford it. When your net pay is allowing you to live and fulfill all your day to day obligations, and there's something left over, think about putting a little bit of that to your future self. As opposed to the immediate needs we want for our present day self.
- So I've talked to Bob Palor, Mister Retirement, on what millennials can do to prep for retirement, but I'm wondering what can consumers who are nearing retirement age do?
- Well they gotta be thinking of, are they exiting out their work for good? Are they gonna transition to another type of employment? So they have some options, for example you could leave your existing 401k if your balance is greater than 5,000 dollars, you can keep it with your former employer. In theory might that be a good thing? I don't know, because what if your employer changes providers? What if the fees goes up? What if you don't have the proper access? You're kind of out of control of your own money. As a general I would suggest that if you're about to retire, and you're at an age where you can start to take distributions, roll those moneys out perhaps to an individual retirement account where now you have complete visibility. We speak to a lot of folks that say I have 401k plans from four employers, I'm trying to track them all down. It's your money, and you left it behind. So I suggest if you have got multiple accounts, as you're getting towards retirement, thinking about consolidation. Two reasons, complete visibility, strategy that's all consistent, and a fixed cost. So you don't have this one has different expenses than this one, consolidate those points.
- Tom thanks for joining me.
- It was great to be with you today.

Alright, first of all, do you even know what a 401k is?

For those who don't know, Tom Zgainer, CEO of America's Best 401k, defined what a 401k is for TheStreet

A 401k "is it's an employer sponsored retirement plan. This year, if you're under age 50, you can put aside 19,000 dollars from your pay with an extra 6,000 dollars if you're over age 50. So basically gives you a vehicle to save either pre tax, or with the Roth. Now what a lot of people don't know about the Roth 401k is it doesn't have income limitations. The Roth IRA does. As you have certain limits of income, your ability to put money into a Roth IRA gets reduced, but not in a 401k. You can still put your whole 19,000 dollars in post tax. That gives people who are doing a little analysis of reduction in tax liability or tax efficiency," Zgainer said.

Alright, knowing what a 401k is is great, but how can you protect your 401k when the market is volatile?

"It depends on what month or week you look at it, right? In December, for example, it was a crushing month. One of the worst months ever in the history of the market in December. We took a ton of phone calls from people, what should I do? Should I cash out? Should I eliminate my 401k? Take a distribution from it? Well here we are since Christmas Eve to today, the markets been up, I think close to 2000 points. So where we thought the sky was falling one month, it's decidedly different the next, your 401k plan is for long periods of investing. If you're in your 20s and 30s, there's going to be differences in the market that are going to be ugly at times, but it always bounces back. So you want to have time be in your favor, the primary thing is to just keep saving," Zgainer said. "

"Don't look at your balances every day, or your statements every month. Because it might not make you happy that particular moment in time. But if you look at it a month later, now you're completely different. The key is just steady as you go over long periods of time, and steadily increase the amount you're putting away each year, which is an important point, because a lot of folks in 401k plans, from the time they're first eligible, they never change the percentage taken out of their pay, two, three years, four years down the road," he continued. "Now you're falling behind inflation. So maybe you want to give your 401k a raise each year. Like we have New Year's resolutions, if I've been putting away two or three percent, can I stretch it to five or six? So these little things we do along the way are going to lead to more accumulation over time."

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