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Nine 401(k) Myths Exposed

July 12, 2021

Nine 401(k) Myths Exposed

A 401(k) is a powerful investment vehicle. However, there is a lot of misinformation surrounding them. Buying into one or more of these common 401(k) myths may cost you a lot more than you bargained for come retirement. 

Keep reading for nine 401(k) myths exposed. Or, contact your certified financial planner, Paul Kalra, at Signature America Wealth Management, Lake Forest, California, to discuss your 401(k).

#1 Your Employer Takes Care of Your 401(k) for You

Even though your 401(k) is employer-sponsored, it does not mean your employer is managing your 401(k) or making changes on your behalf. They aren’t. And they can’t. 

It’s your account. It’s your money. And it’s your job to look out for your future. 

If you aren’t regularly making changes to your 401(k) because you think your employer or plan representative is doing it for you, chances are you may not reach your retirement goals.

#2 You Are Automatically Enrolled in Your Employer’s 401(k) Plan 

While many employers automatically enroll their employees, don’t assume your employer does this. And don’t wait for someone from HR to come to you about it. Take the initiative and contact Human Resources to verify you’re enrolled. 

Even if you are automatically enrolled, contributions may not be anywhere near the level you want to invest each pay period. It’s up to you to elect your own contribution based on your retirement goals and what you can afford. 

#3 Target Date Funds Are the Best Way to Invest 

Buying into this 401(k) myth may be the difference between a comfortable retirement and one where you struggle to make ends meet. 

Target date funds (such as 2030, 2040, or 2050 funds) are popular because you select a fund based on the date of retirement, and then let it do its thing. 

As you age toward your target retirement date, the funds shift toward more conservative investments to reduce risk. Basically, target date funds help make 401(k) investing hands-off. 

Another reason target date funds are on the rise is because many plans have target date funds as the default savings option. When you first contribute to your 401(k), your money often goes into this type of plan ‒ unless you change it, you’ll continue investing in funds that may or may not be right for you. 

The problem is that target date funds don’t offer the best returns. They assume every investor is the same and they are often riddled with fees.  

You may be better off selecting your own investments based on your retirement goals and your risk tolerance, and then rebalancing as needed.  

#4 All You Need to Do Is Set Up Your 401(k) and Sit Back

This 401(k) myth is one that may be doing more harm than good to your account balance. Because contrary to what some investors believe, a 401(k) plan is not a “set it and forget it” program.

It’s just like driving cross-country to grandma’s house. If there is a roadblock preventing you from reaching your destination, you need to make the appropriate changes in order to stay on course.

Think of roadblocks to 401(k)s as changes in tax or trade policy, market volatility, or simply that a great investment is now not performing so well. 

When these events occur, you may need to course correct. This is why being engaged with your 401(k) and regularly rebalancing are so important. 

In down or volatile markets, rebalancing your 401(k) may help you stay within your risk level and protect against potential losses. And in good markets, rebalancing may help you take advantage of opportunities for growth. 

#5 Age Matters When It Comes to Contributing to Your 401(k)

Another 401(k) myth is thinking you’re too old or too young to start contributing. Nothing could be further from the truth.

The cost of retirement continues to rise. Healthcare, transportation, housing – it’s only going up from here. And every bit you save now will help in the future. 

If you’re close to retirement, what you contribute today may make a significant impact on your retirement income. Contributing the max (or close to it now) may also help come tax time with a lower tax bill because contributions are not counted as income. 

For those who are younger, it’s never too early to start investing because you have time on your side. Contributing what you can now allows for the power of compounding to take effect. And you’re able to grow your savings tax deferred. 

#6 There’s No Need to Review 401(k) Statements

Your 401(k) account balance will determine the amount of retirement income you will receive from your plan. Therefore, it’s critical that you review your statements each time you receive one.

Not only does your statement show you exactly how your 401(k) is performing, but it also helps you see where changes need to be made in order to rebalance. 

They also give you an exact breakdown of the fees you’re paying – another factor in how much income you will have come retirement. 

There are hundreds of different types of 401(k) statements based on the company you work for and the plan you are in. While they might look different, most statements contain the same information. 

Check out this video below to learn how to read and understand your 401(k) statements.

#7 It’s No Big Deal to Borrow against Your 401(k)

This 401(k) myth sounds something like this: “I can easily take out a loan on my 401(k) if I have an emergency. It’s no big deal.” 

Well, it may be a big deal when you retire because every dollar you pull out now means you’re losing out on the growth of that money over time. 

To show you how powerful compounded growth is to your future, let’s say you have $75,000 in your 401(k), and you don’t tap into your account. You are 53, and you plan on retiring at 68–or in 15 years. Even if you stopped contributing any more money to your 401(k) for the next 15 years, and you got a 6% return on your money, that money could grow to $179,741. 

In this hypothetical situation, that’s almost $100,000 growth to your account balance – without you ever contributing another cent. 

Another reason it’s not advisable to borrow against your 401(k) is because if you leave your job without the loan paid back, it may cost you more in the long run. 

#8 Employer Matches Are Automatically Yours to Keep

Each employer has its own requirements for vesting. So, depending on your plan’s 401(k) vesting schedule, you may not own the money your employer contributed until you are fully vested. 

Any money you personally contribute is always 100% vested and is yours to keep. 

If you are 100% vested, this means you own 100% of your 401(k) balance and your employer cannot take it back. 

Should you change jobs before you are fully vested, depending on the vesting schedule, you will have to return part or all of the money your company matched. 

#9 If You Contribute the Max, You’ll Have Enough Retirement Income

Saving for retirement without a solid plan is like filling up a car with gas and heading to San Diego from Arkansas without a GPS. Sure, you may end up in California, but probably not close to your intended destination. 

Even then, planning for retirement evolves over time. The plan you created 10 years ago may need to be adjusted for rising healthcare costs, expected taxes, where you plan to retire, and inflation.

This is why it’s important to review your plan and track your progress, and then make adjustments accordingly.  

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