Are you optimizing your company 401K plan? Most probably not and here’s why…

ARE YOU PROPERLY MANAGING ONE OF YOUR LARGEST LIQUID ASSETS?
You are probably not – thinking that you don’t have the time or don’t want to bother about it…

If I were to ask you what your biggest asset was, you would say that it is your house. Granted that the equity in your house may be your biggest asset (depending on when you bought), the question is about largest ‘liquid asset’.

Are you maximizing and optimizing your workplace 401K? Most probably not! If not, you are leaving major amounts of money on the table not giving it attention. That is a huge mistake as workplace 401K’s generally have costs that not very transparent, choices that are usually limited and aspects to the employer plan that could have great benefit to you – and no one told you about them – and you were not interested in learning more. That is no way to treat one of your most valuable assets.

We will help you understand and hopefully raise awareness of some important features of your workplace plan:

1. Are you availing the company match?

That is the easiest one, right? If the company is offering a 5% match and you are not getting the full match, you are literally leaving money on the table. Think of it this way – if the company is offering a 5% raise just for waking up and turning on your computer in the morning, wouldn’t you take it?

2. The ‘Mega Backdoor ROTH’.

This is an important one! Check with your HR or plan provider to see if your company plan has it. Many large companies have this while the smaller, private ones may not. In your 401k plan terminology , it will be called the after tax or post tax contribution. So, why is this important?

Many tech industry employees are highly compensated and their (and household income) high income levels disqualify them from contributing to a ROTH IRA due to income phase out’s. But there is a ‘ROTH backdoor’ that many employees are unaware of or have not bothered to find out. ROTH IRA’s are after tax contributions and after age 59 ½ , there are no penalties and the gains are tax free. Unlike traditional IRA’s, ROTH IRA’s do not have RMD (Required Minimum Distribution) requirements, making them even more appealing.

First of all, remember this ‘magic number’: $63,000 (below age 50) and $70,000 (age 50+). If you thought that all that you could contribute was $23,000 (or $30,000 with age 50+ catch up) annually to your 401K, think again! Here is an example for a 50-year-old employee whose company offers an after-tax plan with the 401K:

401K contribution: $30,000 (with age 50+ catch up)
Company match: $10,000

You now know that the ‘magic number’ is $70,000 and there is potential to contribute upto $30,000 for an after tax contribution that can be rolled over to a ROTH upon employment termination), If your company 401K plan offers that. Even if you are way over the income cut off for a ROTH contribution, you may have a ‘Mega backdoor’ that you can use!

3. You may have access to thousands of investment choices and not just the few choices in your 401K plan

This one is probably news to you! If your 401K plan offers Brokerage Link (through Fidelity) or PCRA (through Schwab), you could give yourself more choice (if you want) through a self directed IRA or through an advisor managed IRA. Some of these 401K plans allow external advisors, like your truly, to manage your 401K through Brokerage Link or PCRA. It is important to note that your funds still stay within your company 401k

but these ‘tunnels’ that are part of the 401K plan allow you expand your investment choices and potentially allow you to work with external advisors.

4. Do you know much your 401K plan costs you annually?

If you think that your plan costs you only $25/quarter, I hate to break the bad news, but that is not so. It costs you a lot more than that, but the costs are not that transparent, unfortunately. There is a plan advisor who charges a fee even though you may have never seen that person. There are also plan fees, 12b-1 fees, among others that in total

can be between 0.5% and above for larger companies and well north of 1% per year for smaller companies. Yes, those fees come your 401K every year. While there is nothing wrong to charge for a service, it is important to know what you are paying – and what you are getting for that fee.

If you really want to dig deep you can search for the Form 5500 that is filed every year by your plan provider for your plan on the web. However, you will also need another document, the Plan Document with associated costs, that will not be on the web. Finding the actual costs of your 401K plan will need patience and perseverance!

5. In-Service rollover vs. distribution

Generally, you can move your 401K assets only after your employment with the company is terminated, either voluntarily or involuntarily. However, several plans give you the capability of ‘rolling over’ part of the 401K into a Rollover IRA under your name at a financial institution of your choice. As it is a rollover from company to company (or trustee to trustee transfer), there should be no tax implication. Some companies stipulate that can be done only at age 55 and over, while some allow employee contribution to be rollover while in-service but not the 401K

matching part until employment termination.

A distribution, on the other hand, is a taxable event as you will be taking money out from your 401K/IRA in your name. The distribution is taxed usually at income tax rates.

Note: This is meant for educational purposes and should not be considered financial or tax advice. Please consult with your advisors.

Arvind Ven is a Registered Representative with and Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC. Financial planning offered through Capital V Group, a registered investment advisor and a separate entity from LPL Financial.

Bradley CableMay 12, 2023