The choices made concerning your 401(k) can have a big impact on your retirement. But at many workplaces, 401(k) plan managers do not have any financial planning experience at all. With this in mind, it's important for you to understand your 401(k), so that you can maximize your hard-earned retirement dollars.
Is Your 401(k) Planner an Amateur?
It is likely that small- or medium-sized firms don't have the resources to hire full-time employees with specialized expertise in managing 401(k) plans. Despite this, many smaller firms still want to offer 401(k) plans as benefits to their employees. Unfortunately, this means that the task of designing and administrating small business 401(k)s often fall to the company's owner or other senior managers, who may have no experience in this area. (Learn more in our 401(k) Plan Introductory Tutorial.)
Although it is possible for an amateur to set up and run a 401(k) plan, getting the most value for plan participants is another matter. Without the requisite knowledge and experience, it may be very difficult for amateurs to compare competing vendors, choose a suitable investment menu and perform many other important tasks.
And since these duties are piled on top of that person's regular work, it is easy to see how this situation can often lead to a poorly-constructed and neglected 401(k) plan for all participants. (If you own a business, this may be the plan for you! Find out about its benefits and eligibility requirements in 401(k) Plans For The Small Business Owner.)
How 401(k)s are Set Up and Managed
Your employer is in charge of designing all aspects of the 401(k) plan, and will determine the requirements to be able to participate in the plan and whether matching contributions will be made. Employers are also in charge of choosing the 401(k) plan vendor, which will determine, in part, the amount of fees that will be charged to the plan. Finally, it is the employer's option whether the plan will allow Roth (after-tax) contributions.
After the plan has been set up, the employer must assign someone to be responsible for selecting and evaluating investments. Sometimes these decisions are made by one person, other times they are made by a committee. Usually only about 10 or 20 mutual funds can be made available for investment through the plan at a given time. (Learn more in our Roth IRA Tutorial.)
Who's Running the 401(k)?
In small firms, it may be easiest to find out who is managing the plan just by asking around. Contact information may also be attached to the plan summary documents given to you by your firm. At larger firms, 401(k) plans are usually managed by someone in the human resources department. As a last resort, you can request the plan's most recent IRS Form 5500 from the 401(k) plan vendor. This document describes the investments, returns and general condition of your plan. Reviewing the 5500 document should give you several names to contact.
Impact on Retirement Assets
If the plan is run by someone with limited financial planning experience, the choices could all be very poor performing, high expense ratio funds. As is commonly noted, even a 1% difference in fund performance can have an enormous effect on your wealth. Another common problem occurs when the plan does not include a broad enough range of choices to be suitable for all participants' investment objectives. Remember that the person making the decisions about the investment menu has a responsibility to the plan participants, so participants should voice any concerns they might have.
Beneficial Retirement Savings
The first step to maximizing your retirement savings is to become educated about your 401(k) plan. A good place to start is to read the plan summary documents provided to you by your employer. If you find that many of your colleagues are unhappy with the plan, perhaps you can work with your employer to design a better plan. Employers have a lot to gain, as a strong benefits package can increase employee morale and help retain high caliber talent.
If there is no way to change your 401(k), you should still think carefully before deciding not to participate. For example, a generous matching contribution from your employer provides a risk-free return on investment. In addition, the tax benefits of sheltering your retirement funds can be highly valuable, if you regularly max out your IRA contributions. (Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return. Read Tax-Saving Advice For IRA Holders, and How IRA Contributions Affect Your Taxes.)
The Bottom Line
Although it can be distressing to learn that an amateur is managing your 401(k), there are still many steps that you can take to make the best of the situation. By becoming an informed participant in your company's 401(k) plan, you can not only maximize your retirement assets, but also make yourself an asset to your employer by helping to create a better benefits package.