Retirement
Questions/Tips

Are you leaving 401(k) money on the table?

by Broderick Perkins

(11/2/2011) - One in three working stiffs isn't getting as much out of his or her retirement plan as they could because they aren't putting as much in the pot as they should.

The broker member-based Financial Industry Regulatory Authority (FINRA) says on average, more than 29.4 percent of 401(k) participants do not contribute enough to their 401(k) to receive their full employer match.

The numbers are higher, 40 percent, among employees making less than $40,000; 41 percent for those automatically enrolled into an employer-sponsored contribution plan and 43 percent of those age 20 to 29, according to FINRA, Inc., successor to the National Association of Securities and not to be confused with a government agency.

Millions of workers are leaving money — perhaps billions of dollars of free money — on the table.

Certainly, many income-poor workers in today's economy often simply don't have enough money to save to fully match their employer's retirement plan. And new employees are often overwhelmed by all the new documents from human relations.

"After receiving a stack of papers, two inches high, covering all of an employee's benefits, many employees don't take the time to read it. I suggest that FINRA make each custodian have a standard one page summary document so that employees can understand the benefits quickly and then go to the marketing materials for more information," sayd certified financial planner and enrolled agent Fern Alix LaRocca, at Whole Hearted Way To Build Wealth.

The deal is a real windfall for those who can and for those who make an effort to stretch financially.

Not available from all employers, a 401(k) plan is a type of tax-deferred retirement investment plan that allows a participating employee to contribute to the plan and have the employer contribute matching amount.

FINRA says there's a substantial boost to your retirement savings by taking full advantage of an employer's matching contribution.

Next year, the Internal Revenue Service is raising the maximum contribution you can make to your 401(k), without paying upfront taxes, to $17,000, up from $16,500 for 2009, 2010 and 2011.

With your employers matching amount, that's $34,000 a year, $340,000 for 10 years, and the money doesn't just sit there collecting dust.

Plans typically offer a variety of investment options, often mutual funds, managed by asset management companies like Vanguard, Fidelity, Franklin Templeton. The funds can be stock-, bond- or cash-loaded or mixed. There's usually a wide choice from which to mix and match based on your goals and tolerance for risk.

In addition to free matching money and return on your investment, there's are significant tax advantages.

Generally, with a traditional 401(k), your contributions are made with pre-tax dollars — the money goes into your retirement account before it gets taxed. Taxes are applied during withdrawals, generally after you've retired and are in a lower tax bracket. Employer match money, earnings, including interest, dividends and capital gains, are also tax-deferred.

Also, every dollar you contribute will reduce your current taxable income by an equal amount, which means you will owe less in income taxes for the year.

The retirement plans can also be tapped before you retire. With restrictions, you can borrow against your contributions for, say, a down payment on a home, your kids education or to start a business.

Not all employers match your retirement investment contributions and even with matching money your savings might not be enough for retirement — a recommended savings level of 10 percent or more of your income beginning as soon as you begin working.

You should crunch the numbers to determine how much you need for retirement, or hire a professional to help you with your retirement plan.

Bottom line? Don't pass up free money.