Do you know anyone younger than 40 who works for a and can count on a pension when they retire? Probably not.
Only government employers and a diminishing number of large employers stillpensions, and even those programs may not be around much longer. Simply , many companies have found it's far cheaper to provide access to 401(k) plans (known as defined contribution) rather than pension plans (defined benefit). Yet many 401(k) plans are less than ideal, as this reader in today's Q&A column.
Question: I'm not happy with my employer's 401(k) mutual -- they lag the major indexes. Should I not contribute to the program?
-- Philip, St. Paul, Minn.
Answer: I see where you're coming from, Philip, but the answer is that you probably should contribute for several reasons. The idea here is that even a less-than-ideal set of investing options nest egg than if you do nothing at all.provide you with a better chance at building a solid retirement
Reason #1 To Contribute: Your Employer May Match Your Contributions
I'll address your concern about the rate of return. Who doesn't like that? : If your company offers to a 401(k) matching contribution, you'd be wise to participate in the plan and take full advantage of it.' performance in just a minute. But for starters, consider the fact that many 401(k) plans come with an added bonus: Some employers match some of the you contribute. So, for example, you 6% of your paycheck into your 401(k), and your employer reciprocates by putting an additional 6% in your retirement plan. Now, that's free -- at a 100%
Reason #2 To Contribute: They Are Tax-Deferred
It's hard to overstate the importance of these plans. Another big benefit here is the fact that they are tax-deferred. That means you are shielding some of your income from while you are in your peak earning years.
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Let's say you're in the 28%(which can be closer to 35% when you account for the income taxes levied in many states). And let's say you eventually withdraw those in retirement and earn less and are in the 15% tax bracket. The difference between your current and future tax brackets is the amount of you are making on your 401(k) -- even if the lag the broader market.
Reason #3: Think Of Your 401(K) As Forced Savings
Also, think of 401(k) plans as a form of forced savings. Putting that aside now and letting it grow for years to come create a much bigger retirement nest egg than if you simply spent the each year. For a simple explanation about how the power of compounding can work for you, read this article.
Now, to get back to the lagging mutual gains. Many lag the major indexes when their particular focus (such as small caps or foreign ) has been out of favor recently. And in the market, a sector or asset class that underperformed the broader market last year can easily outperform the market in the future., it's important to know that past performance isn't necessarily a forecaster of future
Ask yourself: How do these fund that does worse than other small-cap year after year, it should be a concern. Often, you'll find the fund manager overseeing this has just been replaced. (Performance is taken seriously by the firms.) Go to websites like Morningstar.com for information about management changes in key .compare to their peer group? For example, if you are offered a small-cap
Maybe theoptions don't correlate with the kinds of you want. For example, you might want a that focuses on value , and if a value-oriented isn't an , you have a legitimate beef.
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Before You Decide To Contribute, Talk to HR
Here's what to do: Ask your human resources manager these questions. Remember, it's your right.
- Why have these choices lagged the market?
- Do these sufficiently represent all asset classes along the spectrum?
- Are the management fees charged by the plan administrator reasonable, or are they one of the reasons the 401(k) is badly lagging the market?
Your questions may prove to be helpful to the folks in HR, who might not have been fully aware of the recent underperformance. It's more than likely that if you have concerns, so do others. Your HR rep may reach out to the outside organization (known as a plan administrator) that actually oversees the management of your 401(k) and discuss the various.
Read more of our InvestingAnswer Q&A responses: