Last month's Supreme Court decision in Tibble v. Edison made it official: employers have an ongoing responsibility to monitor the investments in company 401(k) plans and, if necessary, remove funds deemed to not be in their employees' best interests.
The case, filed in 2007 by employees of Edison International, alleged the company "failed its fiduciary duty by choosing more expensive retail-class mutual funds when nearly identical and cheaper institutional-class funds were available." Edison International argued the complaints weren't filed within a six-year deadline following the fiduciary lapse, but the court disagreed, saying "the six-year statute of limitations doesn't prevent workers from suing an employer over its failure to monitor."
The decision -- that an employer's fiduciary duty extends beyond initial fund selection -- was widely considered a win for U.S. investors who increasingly rely on 401(k) plans to fund their golden years. The decision addresses a common complaint for these employer-sponsored retirement plans: exorbitant fees. Over time, it could potentially end up saving investors billions of dollars.
Time to celebrate, right? Not so fast.
401(k) accounts are excellent tools for getting started with investing and saving for retirement. But in some cases, poor plan design -- including waiting periods and restricted investment options -- can hurt your ability to save for your financial future. That doesn't mean you should ditch your 401(k), but it does require some extra due diligence on your part to help make sure you're maximizing your 401(k) account. Let's get started:
Maximize your employer match (if offered).
You've heard this a million times and probably think to yourself, "Who would leave free money on the table, anyway?" Well, as it turns out, a lot of people. Last year alone, 56,000 Boeing employees failed to maximize the airline manufacturer's 401(k) match -- to the tune of $100 million.
Let's assume your employer matches 50% of your 401(k) contributions, up to 6% of your salary (i.e., 3%). For employees earning $50,000, the match equals $1,500 annually (or $125 monthly). Over 20 years, the match alone could add up to more than $66,000. There's really no excuse for not contributing enough of your own money in order to reap the full benefits of the company match, so talk to your human resources department to make sure you're on track to get what you're entitled to.
Beware of automation.
Features like automatic enrollment help more and more Americans -- who might not otherwise save for retirement -- make their financial future a priority by automatically placing a percentage of their salary into a default investment, such as a target-date fund. But like a lot of things in life, you've got to take the good with the bad.
With automation, it's all too common for investors to assume their retirement plan is "good to go" and therefore doesn't need anything else -- no rebalancing, no asset-allocation review, no additional savings increases. Such behavior (or lack thereof) can leave you dangerously short of accumulating the nest egg you need to live the retirement lifestyle you want. Here's what to do to help combat this "set it and forget it" mentality:
- Sell your target-date fund in favor of a customized mix of investments. Take advantage of in-plan advice, if offered, to help you pick the right funds and the right percentage to invest in each to best support your long-term retirement goals.
- Don't assume an automatic 1% annual increase to your 401(k) account is all you need to do. In addition to auto-increases, adjust your savings rate on your own when you receive a raise or tax refund, adjust your budget or finish paying off debt. Saving more whenever possible -- not just once a year -- can have a significant impact on your nest egg.
- If available, sign up for auto-rebalancing to help maintain an appropriate level of risk and to bring your portfolio back in line with your target allocations. Automated rebalancing helps protect the well-laid plans you made when first selecting your fund lineup.
Avoid 401(k) loans.
Borrowing from your 401(k) account to avoid foreclosures or feed your family is one thing, but in most cases, 401(k) loans are not a good idea. In addition to the loss of compounded tax-deferred growth on the borrowed amount, dipping into the 401(k) loan "cookie jar" often results in damaging long-term behaviors.
For example, you'll likely contribute less to your 401(k) and could even find yourself taking more than one loan. A 2013 study of 180,000 401(k) loan recipients showed that two-thirds of plan participants took more than one loan over a 12-year period; further, 25% took out a third or fourth loan and 20% borrowed from their 401(k) account a whopping five times or more. Your 401(k) isn't meant to be a piggy bank you can tap into whenever you like, so make it a priority to build up a substantial emergency fund you can access during a financial emergency.
The 401(k) was never really intended to be our primary means of saving for retirement, but maximizing your 401(k) account is an important part of a sound overall investing and retirement strategy. While the Supreme Court decision is expected to impact 401(k) investors for the better, do your financial future a favor and apply the fiduciary standard -- the obligation to put investors' best interests first -- to your own saving and investing decisions.
This article originally appeared on Wiser Advisor.
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