In today’s world where employers rarely offer traditional pensions, for many, the 401(k) can be the most significant way to put money away for retirement and defer income taxes.
Here are five account features that many 401(k)s offer to help you get started saving and to keep it going.
- Automatic Enrollment – Most employers now automatically enroll new workers into the company 401(k) plan. This certainly helps those who say they will ‘get around to it’ or ‘I can’t afford it right now’. In these plans, it is up to the employee to opt-out.
- Choosing Investments – Another popular way to overcome investor inertia is to make an investment choice for new hires. The default in some plans is a target retirement mutual fund based on the age of the plan participant.
- Automatic Contribution Increases – Some plans go so far as to increase your contribution rate every year. For example, they may ratchet-up your savings by 1% or 2% each year until you reach 6% (or more) in salary deferral. This can also be stopped, but requires action to do so.
- Roth 401(k) – Generally, Roth contributions accumulate tax-free, but do not allow for a current year income tax deduction. This may make sense for someone in a low tax bracket. Also, you can typically split your contributions between pre-tax and Roth accounts to get your desired mix.
- More Investment Choices – Many companies limit the number of investment options to keep plan costs down, but include a self-directed brokerage option. In these accounts, workers can pick from a large platform of mutual funds and ETFs. They have become popular with employers because they usually only count as one option, even though it actually opens the door to many more.
It may take more of your own money to prepare and save for retirement, but at least employers today are trying to point you in the right direction.