For many Americans, a company retirement plan is their primary source of retirement savings and investment experience. As an adviser who has overseen several corporate retirement plans, I have had the opportunity to compile what I believe are the most common mistakes by plan participants. As some shortfalls may be more obvious than others, this list can stand as a basic outline for administrators to review with participants.
1. Participate in your plan. If your company provides any type of match or monetary benefit for deferring money from your paycheck to your retirement, it is free money for the taking. If you are already deferring the required percentage to receive the full match, make sure your spouse is maximizing his or her match before you decide to increase your contribution.
2. Eligible to participate with more than one company? Some may have more than one job, and be eligible to participate in both plans. Go ahead and capitalize on receiving the match from both companies. This can be very lucrative, but speak with a tax adviser to make sure to stay within the annual contribution limitations.
3. Stop attempting to swing trade the account. Most self-directed retirement plans offer 12 to 15 sessions per year to change a portfolio allocation, which is typically more than enough. Yet, some participants try to actively and frequently time the markets in their 401k portfolio. Portfolio timing is difficult and statistically not fruitful considering the plan investments are priced at the close of the market.
4. A 401(k) is a tax vehicle. Feel like you are paying more than your fair share of taxes? For many, pre-tax contributions to a retirement plan is one of the few top line deductions available before establishing a marginal tax bracket. A participant’s tax burden should be taken into consideration when deciding a contribution percentage and whether it will be on a pre-tax or post-tax basis.
5. Beneficiary check-up. Unless legally waived by a spouse, he or she is the 100 percent primary beneficiary in the state of Florida. If recently divorced, one should consider reviewing who is named as the primary.
6. Seek the proper source for advice. Most company human resource managers do not have the time or knowledge to provide proper planning advice to retirement plan participants. Yet, it has been reported that a company’s human resource manager is the primary source of sought out advice by most participants. Make sure to leverage the retirement plan financial adviser or some other outside professional adviser.
7. Create an investment plan that includes rebalancing during times of turbulence. I truly believe “risk” is a negative element in a portfolio if you do not actually know how much of it you hold. Creating an asset allocation that fits your financial profile and risk tolerance is the first step to defining risk. Your game plan should include periodic rebalancing as opposed to impulsive changes in relation to substantial market movements.
8. Who is steering the ship? The ultimate responsibility is left up to the participant in a self-directed retirement plan. No one else has control of changing the portfolio or contribution amounts. It is easy to be complacent in opening your statements or seeking out guidance.
9. Do not cast out or loan against your plan. At the height of the market capitulation late last March, many participants decided to completely cash out of their retirement plan, without considering the tax implications, to fully separate their assets from any further market movements. The money deferred to a retirement plan needs to be cultivated through all types of markets, including a downturn. This also includes deterring from loaning against one’s retirement funds for a lavish purchase or investment.
10. Capitalize on opportunities to roll your funds into an IRA. Even though Congress has created much more transparency within qualified retirement plans, they are by nature limited and more expensive than a typical individual retirement account. Leaving assets unattended in an old retirement plan can be detrimental to your long term objectives.
Griffin Dalrymple, wealth manager with Opinicus Wealth Management, can be reached at (941) 847-0035, ext. 222 or email@example.com..