Strategies for Funding and Managing your 401(k)

The 401(k) fund is undergoing a few changes that are bound to affect almost everyone in its coverage. As such, if you are planning to fund your retirement using the 401(k) accounts, it is about time that you took a keen interest in the changes that are in the offing. Of course,  the largest change is going to be in the amount that you will be required to contribute towards your retirement. The government is in the process of setting up a thrifts savings plan that will increase this value from $500—from $17,000 to $17,500. These changes are expect6ed to be in effect as from the 31st of December this year. This is a good thing fro most people as it means the amount of money that will be available to you upon retirement will increase. To take advantage of these chances it is important that you perform an audit to determine that you paying as much as you can legally. In addition, some significant changes that have been added include changes in the disclosure provisions. From the start of the coming year, the first that 401(k) participants will be eligible to receive quarterly and annual statements listing fees, which are to be charged to the account.

So what are some of the strategies that you can put in place in order to ensure that you maximise the 401(k) strategy? To start with, you should be keen on the amount that you pay in fees. The percentage that you pay in order to manage your account may at the end of the day be more than you can actually handle if care is not taken. If it is possible for you to minimise the amount that you pay in fees, then the better for you. You can minimise these fees by investing in low cost index funds or by managing the fund yourself. It is also important that you keep yourself from trying to tap into your retirement funds at an early age. The temptation is often great especially if you are going through some tough economic times. However, keeping yourself aware of the danger you pose through such an action goes a long way in keeping you level headed.

It is essential that you come up with an investment plan and stick with it. At times,  some investments like the stock market tend to fluctuate with time depending on the market direction. This is usually one of the main reasons for people changing their strategies. However, it is often not advisable to change the execution of your strategy midway, especially if it involves spending more than you are comfortable with. You can also use the roll over strategy in cases where you have a large sum in the works and you would like to invest as well. Often, the cash cheque is tempting enough that most people would rather take it instead of investing it. Taking your time to fine tune the 401 (k) accounts is a good strategy that pays off at the end of the day.

How Much Are You Paying For Your 401(k) Plan?

How Much Are You Paying For Your 401(k) Plan?

Have you ever wondered “How much are you paying for your 401(k)?”  There is a good chance that your HR has not discussed this particular figure with you but starting Aug. 30, that will change.

In unprecedented policy change, the U.S. Department of Labor will require employers or administrators of 401(k) plans, to disclose how much they are charging to operate these retirement plans.   This new policy is being welcomed by many certified public accountants and financial advisors including my boss, Sanjiv Gupta CPA.

“Some employers or administrators may be getting worried because they may not want to openly discuss this particular figure,” says Sanjiv Gupta, CPA.

Cost of retirement plans can very but you can expect anywhere between .3 to 2% if your account balance is less than $50,000.   Some of you may even chose to move your retirement plan once you know the exact cost of your plan.

“You don’t have to wait till August to find this number. Simply ask your CPA or Financial Consultant.  In simple terms, these cost can add up to hundreds of thousand dollars over  you the life of 401K account.” advises Mr. Gupta.

You should also note that employees of small company are probably paying more for their 401K account than the employees of larger company.  Larger employers have more leverage and usually have better and cheaper retirement plans.

New companies or companies will lots of newly hired employees are also likely to have higher cost and this higher cost ends up divided among participants.

Before you go all nuts about the cost of your retirement plan, let me remind you that understanding the true costs of a 401(k) hasn’t been easy — even for employers but that is about to change.

 You should expect this in mail or on your desk very soon.

You will receive a 20 page document will lots of information divided into 2 main sections.

  •  Along with your investment options you will also get an explanation of administrative expenses and fee suchs as legal, record keeping and accounting.
  •  You will also get an explanation of what kind of fees and expenses can be deducted from your account.

You will also get investment-related information:

  •  You will get some financial information about the historic performance.
  • And bench marking information comparing investment with broad-based market index

You will also get some other annual operating expense report but it’s not free.   Cost for providing this information is about $4 and your employer is allowed to subtract this from your 401(k) quarterly.

 What can you do with this kind of report? Start by asking some questions to yourself.

  • What are the total all-in fees and expenses?
  • What are we getting return for the cost?
  • How much it will cost me over the life of retirement account?

This new will make employers look twice at the price they are paying for 401 (k) plans and motivate them to offer better options.  At the same time, employees should not focus solely on plan cost.  You may get some really good fund manager or some really good fund options.

You should also note not to put too much in your company stock.  This can be seriously dangerous if your company financial health gets in trouble.

401(k) plans are important decisions and you should consult with your CPA or financial consultant on quarterly basis to make sure you are getting the most for your money.

401(k), 403(b) and 457 Plan Limits for Year 2012


Good news – you can set aside up to $17,000 in total in various kinds of employer sponsored plans.   Please note this individual limit is the maximum amount a person can electivly save as deferred salary inside section 401(k), 403(b) or 457 plan.

Senior citizens and individuals age 50 years old or older can also save an additional $5,500 as a designated “catch up” contribution.   This brings your total limit to $23,500.00 . This is a great opportunity for those who want fill up the retirement income bucket.

Please note there is a maximum limit on your total contribution in 401K plan. For the year 2012, that limit is $50,000, meaning you total contribution including you and your employer has to be less than $50,000.

New limitations was announced by IRS in form  IR-2011-103.  You can also check out the IRS website for other kinds of retirement plan limitations.