Insights to help you plan, live and invest well.

Three Business People with Briefcases

Over the years, I’ve compiled financial issues and topics that come up consistently in client meetings. Part of my job as an advisor is to empower clients with useful information. This resource center will address the questions I hear most often, as well as my personal insights as a female advisor.

Changing jobs means changing to a new slew of benefits. While you may have gotten a giant new hire packet and tossed it aside for leisure reading, make sure you are proactive about learning a few things about your new 401(k) plan. What you were used to at one job is likely very different at your new job. Make sure you know the answers to these questions to get started:

When can I enter the plan?

Check to see when you are eligible to enter the plan. What is the service requirement? Once you’ve completed the service requirement, you also need to know when you can enroll. If, for instance, your plan requires a year of service and quarterly entry, it’s pretty easy to let a year roll by and miss entering the next quarter. You don’t want to have to wait another quarter because you missed your first opportunity to enroll.

Do I need to opt in or is this an auto-enrollment plan?

Let’s assume in the above example your plan utilized auto-enrollment. That means unless you affirmatively opt out, you will be enrolled as soon as you are eligible at a set deferral percentage. Typically, auto-enrollment percentages can be set rather low – maybe as low as 2%. Just because that’s what you were defaulted into, don’t assume that is appropriate for you. Maybe your plan has a Roth 401(k) option but your auto-enrolled dollars are going into the pre-tax bucket. It’s important to review when you are being defaulted, in what percentage, and in what investment vehicle.

Is there a Roth 401(k) feature?

Roth features are all the rage these days, so there’s a good chance your plan has one. Remember that choosing between regular pre-tax deferrals and after-tax Roth deferrals is not an either/or decision. As long as you do not exceed the annual deferral limits, you can split your contributions in each bucket. Just remember that any contributions from your employer such as a match will always be pre-tax, regardless of how you defer your own money.

Is there a company contribution?

You likely asked this question before accepting a job offer, but make sure you explore the details of your company’s contributions, if any. You want to know things like whether it is a match or if it is non-elective. What’s the vesting schedule? If there is a match, you need to know how it is credited to your account (Is it deposited per pay period? Is there a true-up?). I’ll do a deeper dive on different types of employer contributions in another post.

What investment options are available?

Your new plan may have a limited selection of funds or a larger menu. If you are a do-it-yourself person, you’ll want to explore what you have to work with; if you are more hands off, you want to look at the target date options, or if there is an asset allocation fund that makes sense.

When working with employees in 401(k) accounts, most everyone wants to know what they should be contributing. First, you need to know what you can contribute. Let’s review the 2017 limits:

 

2017 limits

Employee salary deferral limit to 401(k) plans

$18,000

($24,000 if you are age 50+)

Maximum compensation for qualified retirement plans

$270,000

Annual addition limit

$54,000

($60,000 if you are age 50+)

Let’s dive deeper into what the above numbers mean.

The employee salary deferral limit is the limit on how much you as an employee can put away from your paycheck. If, however, your employer contributes money on your behalf (perhaps in the form of a match or a profit sharing contribution), the maximum amount that can be added to your account for 2017 is $54,000 – the annual addition limit. If you are earning a large salary, only the first $270,000 of your income will be considered when calculating contributions to your plan.

Now comes the magic question of what you should aim to be contributing. Beyond the obvious and useless answer of “it depends,” the simple answer is the annual maximum. The practical answer is as much as possible with increases each year. An industry rule of thumb of the moment is 10 - 15%.

I highly recommend looking into the tools and calculators available through your 401(k) provider’s website. There should be a take-home-pay calculator that enables you to input your salary and tax rates to see how increasing your contribution may affect your paycheck.

To think about it another way, consider Social Security taxes. Between the employee and employer, 12.4% is being contributed to the program (6.2% each) to supplement those retired or suffering from a disability. Compare that to what you are putting aside for yourself each year.

Raymond James and its advisors do not provide tax services. Please discuss tax matters with the appropriate professional.