Not everyone is fortunate enough to have access to a 401(k) plan. Unless you’re self-employed, you’ll need your company to offer one of these savings plans to have the option to contribute. Otherwise, you’ll be limited to an IRA.
Now, IRAs aren’t bad at all. In fact, they offer a world of benefits. But one drawback to being limited to an IRA is that these plans come with much lower annual contribution rates than 401(k)s do.
Currently, 401(k) plans max out at $19,500 for workers under 50 and $26,000 for those 50 and over. IRAs, on the other hand, max out at $6,000 for workers younger than 50 and $7,000 for the 50-and-over set.
But just because you have a 401(k) doesn’t mean you’re getting as much out of that account as you could be. Ask yourself these questions to see if you’re really maximizing your plan.
1. Am I getting my full company match?
Many employers that sponsor 401(k) plans also match worker contributions to some degree. Your goal should be to contribute enough to your plan to snag that match in full. If you don’t, it’s like giving away free money.
Say your company will match contributions of up to 6% of your salary. If you earn $60,000 a year, contributing $3,600 a year, or $300 a month, will give your full employer match.
Now, say you manage to snag a free $3,600 a year from your employer over a 20-year period. If your 401(k) delivers an average annual 8% return (we’ll discuss that in a bit), you’ll wind up with about $165,000 in savings based on your company’s contributions alone.
2. Am I investing aggressively enough?
There’s risk involved in putting your savings into stocks, since they’ve historically been far more volatile than bonds. But if you want to enjoy strong returns in your 401(k), then stocks are the way to go.
Now you generally can’t buy individual stocks in a 401(k). But you can invest in different funds with a stock-focused strategy.
The 8% return we used in the preceding example is a few percentage points below the stock market’s historical average. If you stick mostly to bonds in your retirement plan, the return you get may be closer to 3% or 4%, which won’t result in nearly as much growth.
3. Am I avoiding needlessly high fees?
Most savers have different 401(k) funds they can choose to invest in. Chances are, your plan contains a mix of actively managed mutual funds and passively managed index funds.
Index funds have the goal of matching the performance of the benchmarks they track. An S&P 500 index fund, for instance, will aim to perform as well as the S&P 500 itself.
The upside of choosing index funds for your 401(k) is saving money on fees. Actively managed funds charge much heftier fees because you’re paying the salary of the people who are tasked with hand-picking investments for you. And while actively managed funds sometimes outperform index funds, often, index funds do better. Or, to put it another way, paying higher investment fees won’t necessarily translate to better performance.
If you’re going to save in a 401(k), you might as well get the maximum benefit out of that account. In addition to answering these questions, keep checking up on your 401(k) to ensure that it’s setting you up for the retirement you deserve.