By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
Recently PLANSPONSOR put together a nice list of ten items 401k participants should review. Inspired by that list, following are five action items that you and your investment adviser may wish to consider sharing with your employees in your annual employee education sessions:
1. Contribute as much as you can
Remember, we all need to average at least 15% in additions to our 401k accounts each year if we are to retire without reducing our standard of living. Since most of us don’t contribute anything close to that amount, advise 401k participants to consider increasing their contribution rates by at least 1% every time they get a raise. Increasing contributions gradually when participants experience a salary increase minimizes the impact of additional 401k contributions on take home pay.
2. Grab all of that free money
Most 401k plans have a company matching contribution and believe it or not, most participants do not contribute the amount necessary to receive the maximum employer match. As a result, they leave free money on the table. Quick, what is the best performing investment in any 401k plan? Of course, employee contributions that result in a company match! In most plans the company match is dollar for dollar up to a certain percentage – resulting in a 100% immediate return on investment.
3. Consider target date funds
Most 401k participants are too busy to manage their 401k accounts properly. As a result, many only look at them in times of stress (think crashing markets). The decisions some make at those points are not necessarily helpful in achieving a comfortable retirement. The experts believe 75% of all plan participants should invest 100% of their account balances in target date funds. Professional management can help participants avoid making bad decisions in times of stress.
4. 401k participants should set goals
Not enough of us do this. It is hard to discipline ourselves to save when what we are saving for is ambiguous. It is easier for participants to set meaningful savings goals if they know whether they are going to travel, relocate to a warmer climate or continue to work in retirement. Even if their retirement turns out completely different from what they had planned, having goals now makes the future seem more concrete.
5. Don’t take withdraws or borrow
Plan loans are one of the worst investments 401k participants can make. Amounts borrowed are double-taxed and the rate of return on borrowed funds (a loan is one of the investments in a borrower’s account) is equal to the interest rate on the loan. Remember the S&P 500 returned nearly 32% in 2013! Withdrawals permanently remove assets from participant retirement accounts.
Help your participants stay on the path to retirement readiness. Share these recommendations with them during this year’s annual employee education sessions.
About the Author
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
About Lawton Retirement Plan Consultants, LLC
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.