With all that hidden treasure in 401k plans, you’d think retirement investors would take the time to know exactly what’s in their retirement plans, so they can make informed investment savings and withdrawal decisions.
Unfortunately, it is not a trend.
In fact, a recent study by Dream Forward, a 401k plan provider, showed that 63% of 401k plan holders “don’t understand 401k and financial terminologies.”
As usual in the streets of finance, a little knowledge goes a long way.
So, although 401k plan providers typically don’t provide the necessary transparency about their plans, it is up to participants to plan for uncovering the so-called “hidden” realities about their 401 plans.
In the dark on key areas 401k
Retirement planning experts say there are many 401k features and provisions that plan holders don’t have a good grip on, and this is an issue that needs to be addressed immediately.
These 401,000 areas of knowledge omissions are at the top of the “to-do” list.
Plan the prices. One of the biggest challenges 401 (k) plan participants have been facing for years is pricing non-transparency.
“401 (k) plan providers share information with participants and are required to do so at least every 14 months, but the documents are often long, difficult to analyze, and not overly clear,” said Eric Phillips, CFA and senior director at Human Interest.
A particular area of interest should be 401,000 plan fees, which can easily erode the plan’s investment earnings. “Even 1% of the additional annual costs of running 401 (k) could lead to a 25% or greater reduction in retirement savings,” Phillips said.
Roth flexibility options. Another key aspect of 401k that employees / people don’t know about is the ability to contribute to a “Roth-like” option in their 401k plans.
“Many large companies allow a Roth investment option, although some small companies may not,” said Arvind Ven, CEO of Capital V Group, a financial planning firm. “If you are eligible, this ‘ROTH mega backdoor’ allows 401,000 investors to contribute, potentially well beyond regular ROTH contributions, which allow for contributions of $ 6,500 or $ 7,000 (if over the age of 50) per year.”
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If their plan’s investment fits their long-term investment goals. One of the main elements of the 401k plan is hidden in plain sight: the asset allocation and underlying investments of the managed funds.
“With the popularity of target date funds / target risk funds and automatic enrollment, people know very little about what they are investing in,” said Paul Swanson, vice president of retirement at CUNA Mutual Group. “Unfortunately, most 401k investors don’t take responsibility for ensuring that the investment matches their personal goals and risk tolerance.”
Life cycle investment risks. Another hidden aspect of 401k plans is the lack of understanding of the life cycle investment style, which is a common strategy in pension plan funds.
“These are the funds that have a year on them, like 2025 or 2030,” said Teresa Arrigo, financial advisor to GenWealth Financial Advisors. “If investing in individual funds is overwhelming for 401k plan participants, these funds can be a great way to invest and achieve a level of diversification.”
However, what many don’t know is that the bond to equity ratio changes on its own with life cycle funds.
“A fund 15 years or less from the date indicated has a much higher percentage of bonds than many expect,” said Arrigo. “When the fund was selected, the participant probably noticed that there was a large amount of money set aside for growth. What they may not know is that the fund shifts to a more conservative allocation over time. “
Plan for rollover errors. Many 401k investors don’t realize that when leaving a business, it is a mistake to withdraw 401k funds directly.
“When you leave a business, do not withdraw your 401 (k) funds directly as this can result in significant fees,” said Mindy Yu, director of investment at Betterment at Work. “Instead, take the opportunity to transfer your 401 (k) to a new employer’s retirement plan or to your IRA account. We recommend that you do this via direct IRA transfer or direct 401 (k) rollover by check. “
Time to get educated on 401k plans
How can 401k investors really learn more about their 401k plan?
The best way to find out more about your individual 401 (k) plan is to contact your HR / benefits team.
“Your company’s benefits specialists should have all the information you need to make sure you are properly registered, contributing an appropriate amount, and fully understanding the benefits they are offering (for example if your employer offers a 401 (k) match, and if you’re contributing enough to meet that match), “Wu said.
If your company employs a pension provider or financial advisor to manage and administer 401 (k), it may direct you to another party to get all the information you need.
“It’s important to be educated about your 401 (k) so you have a good idea of how the offering works and if you’re on your way to a well-funded retirement,” Wu said.