4 key questions to ask employers about their 401(k)
Quirky workplace perks, like indoor putting greens and free popcorn in the break room, might drive some Millennials to jump at taking a job.
But the basics, like what’s the match on the 401(k), will have a more meaningful effect on how much money you’ll be able to sock away.
When it comes to 401(k) programs, the specifics at individual companies can be all across the map.
Yet if you’re looking for a job, it’s as important to compare 401(k) plan benefits as it is to seek a competitive salary. Here are some questions to ask potential employers to get you started:
How much money will you add to my 401(k)?
One beauty of a 401(k) is that many companies offer money to match what you save.
Some companies will contribute 50 cents on every dollar you contribute, up to 6% of your contributions. Essentially, that can translate to basically the same thing as a dollar-for-dollar match up to
3% of your pay before taxes. You’re walking away from that extra money, though, if you don’t save in the
401(k).
Will you help sign me up automatically?
Plenty of parents and grandparents will tell a 20-something that they must rush to sign up for the 401(k). And employers are making it easier to enroll. But what if you drag your feet? Don’t worry. Many companies, in- cluding Quicken Loans and Ford Motor, now will sign up new hires automatically and make you save, if you don’t enroll on your own.
“We do automatically enroll in the
401(k). They do have the ability to change that at any time,” said Mike Malloy, chief people officer for Quicken Loans. “We believe we’re doing the right thing with our team members.”
Malloy said saving for retirement is part of a team member’s overall financial wellness. New hires who are juggling student loans tend to want to learn how to balance their financial obligations — and don’t typically skip saving in the 401(k) once they are signed up.
“We don’t see a lot of people opting out, once opted in,” said Malloy, who declined to give specifics on Quicken’s
401(k) plan.
Katie Taylor, vice president of thought leadership at Fidelity Investment, said more employers have been adding automatic enrollment in recent years for new hires.
About one-third of employers with
401(k) plans run by Fidelity will automatically enroll their employees in retirement savings plans, she said. Among larger employers with 1,000 or more workers, about 60% offer auto-enrollment, Taylor said. Of the plans that offer auto-enrollment, about 49% focus on new hires, while 51% will auto-enroll any eligible employee, she said.
The Pension Protection Act of 2006 addressed some employer concerns about the automatic feature. Depending on the plan, employees may have a 90day window after auto-enrollment to opt out by withdrawing contributions and earnings. They would owe income tax on those contributions and earnings but would not be subject to a premature distribution penalty of 10%.
Of course, more people end up saving in 401(k) plans when their employer automatically enrolls them.
Automatic enrollment nearly doubles participation rates among new hires, according to a report issued by Vanguard in March. Employees can stop making contributions at any time, but many times they don’t make changes because of inertia.
Will you help me increase what I contribute toward retirement?
About 42% of employers with automatic enrollment set that contribution rate at 3%. But others might set the rate at 5% or 6%, according to the Vanguard report.
And some employers gradually increase the automatic savings by a few percentage points a year. Take time to understand an employer’s plan.
If you start out saving 3% of pay, it’s wise to make sure that you’re aiming to boost your savings rate over time to get closer to 10% or more to save a reasonable amount of money toward retirement.
“Three percent is great. It’s a great starting point, but 3% isn’t enough,” said Fidelity’s Taylor.
If an employee gets a pay increase, she said, it’s a good time to increase one’s contribution to a 401(k) plan.
Some goals to consider: Aim to have one year’s salary saved up in a 401(k) plan by 30 and have two times your salary saved by age 35, according to Fidelity. By age 60, you’d want to have eight times your annual income already set aside in retirement savings.
To get there, try for saving something closer to 15% or more as early as age 25 — including any company match.
For 2018, the basic limit on employee contributions for 401(k) plans is $18,500. The catch-up contribution for those 50 and older is another $6,000. Other limits can apply based on the plan.
Do I have any choice about how my retirement money is invested?
Many times, you’ll have a dozen or more options to consider when it comes to investing in stock funds and bond funds. But if the employee is automatically enrolled and doesn’t choose how to invest the money, most of the time — nearly 64% of plans — initially will end up investing the money in target retirement date funds, according to Plan Sponsor Council of America.
A target-date fund offers a mix of stocks, bonds and cash that takes on more risk when you are younger. The target date is geared to the year you’d likely retire.
Employees can always move that money into other mutual funds and other investments. The younger you are, the more likely the target-date fund will be aggressively tilted toward stocks.
But many retirement savings plans offer different default options — including balanced funds (a set mix of stocks and bonds), as well as very conservative options, such as a money market fund and stable value funds.
Contact Susan Tompor at stompor@freepress.com or 313-222-8876.
Susan Tompor
Some employers gradually raise the automatic savings by a few percentage points a year. Take time to understand an employer’s plan.