US investors hold $10.4 trillion in assets of 401,000 in the first quarter of 2022, making 401,000 by far the popular choice for Americans saving for their retirement years.
With all that treasure hidden in 401k plans, you’d think retirement investors would take the time to find out exactly what’s in their retirement plans, so they can make informed savings decisions. and withdrawal.
Unfortunately, this is not a trend.
In fact, a recent study by Dream Forward, a 401k plan provider, showed that 63% of 401k plan holders “don’t understand 401k and financial terminologies.”
As usual in the ways of finance, a little knowledge goes a long way.
So while 401k plan providers generally don’t provide the much-needed transparency about their plans, it’s up to plan participants to uncover the so-called “hidden” realities about their 401(k) plans.
In the dark on key 401k areas
Retirement planning experts say there are many 401k features and provisions that plan holders aren’t familiar with, and it’s a problem that needs to be addressed immediately.
These 401,000 areas of missing knowledge are at the top of this “to do” list.
Package pricing. One of the biggest challenges 401(k) plan participants have faced in years is non-transparent pricing.
“401(k) plan providers share information with participants — and are required to do so at least every 14 months, but the documents are often long, difficult to parse, and not too clear,” said Eric Phillips, CFA and senior director at Human Interest.
One area of particular concern should be 401k plan fees, which can easily erode the plan’s investment gains. “Even 1% additional annual costs in 401(k) management could lead to a reduction of 25% or more in retirement savings,” Phillips said.
Roth flexibility options. Another key aspect of 401k that employees/people don’t know about is the ability to contribute a “Roth-like” option to their 401k plans.
“Many large companies allow a Roth investment option, although some smaller companies do not,” said Arvind Ven, CEO of Capital V Group, a financial planning firm. “If you qualify, this ‘mega ROTH backdoor’ allows 401,000 investors to contribute, potentially well beyond normal ROTH contributions, which allow contributions of $6,500 or $7,000 (if you have more than 50 years) per year.”
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Whether their plan’s investment aligns with their long-term investment goals. A major element of the 401k plan is hidden in plain sight – the asset allocation and underlying investments of the managed funds.
“With the popularity of target date funds/target risk funds and auto-enrollment, people know very little about what they’re invested in,” said Paul Swanson, vice president of retirement at CUNA Mutual Group. “Unfortunately, most 401k investors don’t take responsibility for making sure the investment fits their personal goals and risk tolerance.”
Investment risks throughout the life cycle. Another hidden facet of 401k plans is not understanding lifecycle investing, which is a common strategy in retirement plan funds.
“These are the funds that are one year old, like 2025 or 2030,” said Teresa Arrigo, financial adviser at GenWealth Financial Advisors. “While investing in individual funds is overwhelming for 401k plan participants, these funds can be a great way to invest and achieve a level of diversification.”
However, what many don’t realize is that the bond-to-equity ratio changes on its own with lifecycle funds.
“A fund that is 15 years or less from its date of appointment has a much higher bond percentage than many realize,” Arrigo said. “When selecting the fund, the participant probably noticed that there was a significant amount allocated for growth. What they may not know is that the fund shifts to a more conservative allocation over time.
Schedule rolling errors. Many 401k investors don’t realize that when you leave a company, it’s a mistake to withdraw 401(k) funds directly.
“When you leave a company, do not withdraw your 401(k) funds directly as this can result in significant fees,” said Mindy Yu, chief investment officer at Betterment at Work. “Instead, take the opportunity to transfer your 401(k) to a new employer’s retirement plan or to your own IRA account. We recommend doing this through a direct IRA transfer or a direct 401(k) rollover by check.
Time to learn about 401k plans
How can 401k investors really learn about their own 401k plan?
The best way to learn more about your individual 401(k) plan is to contact your HR/benefits team.
“Your company’s benefits specialists should have all the information you need to make sure you’re properly enrolled, contributing an appropriate amount, and fully understand the benefits they offer (for example, if your employer offers a 401(k) match, and if you contribute enough to meet that match),” Wu said.
If your company uses a pension provider or financial advisor to manage and administer the 401(k), they can refer you to another party to get all the information you need.
“It’s important to learn about your 401(k) so you get a good idea of how the offer works and whether you’re on the right path to a well-funded retirement,” Wu said.