Employer-Sponsored Retirement Plans
Do you contribute to a defined contribution plan (IRA, 401(k), 403(b), etc.)?
Do you know the maximum allowed contribution and are you making it?
Are you contributing enough to get 100% of any company match?
Are your investments (asset allocation) aligned with your risk tolerance?
Do you review your investments/plan at least 2 times per year?
Things to consider
Many employer-sponsored plans — including 401(k) plans, 403(b) plans and 457 plans — match employee contributions. Employees with access to these plans should take advantage of the opportunity to accumulate tax-deferred earnings. At the very minimum, contribute the necessary amount to get the maximum employer match. A professional can help you manage these employer sponsored retirement plans.
What you need to know
2016 contribution limits for employer-sponsored retirement plans (ESRPs)⁵
1. $18,000 per year under age 50; $6,000 additional per year in catchup contributions for age 50+ (401(k)/403(b)/457)
2. $12,500 per year under age 50; $3,000 additional per year in catchup contributions for age 50+ (Simple 401(k) & Simple IRA)
Facts about ESRPs:
1. For participants that are otherwise not saving for retirement, a 401(k) plan creates a false sense of security. Their perception is that as long as they are in the plan, their retirement is taken care of — but it’s not.
- 73% of 401(k) participants stayed at the same contribution rate in 2012, while only 23% increased their rate.
2. The responsibility of preparing for their long-term financial future is left with a population of people who, for many reasons, are not equipped to handle it. Because of this, millions of people are unprepared for retirement.
- More than half (52%) of 401(k) participants say they don’t have the time, interest or knowledge to manage their portfolio properly.
- 83% of 401(k) participants say they are interested in receiving professional investment management from their employer.
“Bridging the Gap Between 401(k) Sponsors and Participants” 2012, commissioned by Schwab Retirement Plan Services, Inc. and Schwab Retirement Plan Services Company. A sponsor study was conducted by CFO Research Services and a participant survey was conducted by Koski Research." http://www.schwab.com/public/file/P-8506158
What it means
$222,360 over 40 years ($2,250/year)
That could be the cost of not taking advantage of employer-matching contributions. Assuming 50 cents per dollar up to 6% of pay, an individual earning $75,000 who does not contribute gives up $2,250 every year, or as much as $222,360 over a 40-year career, assuming a 4% growth rate.
Catch-up contributions — 401(k), 403(b), and 457 accounts
If you contribute an extra $6,000 in the year you turn 50 — and each year there after until age 65 — you can accumulate quite a bit of extra money in your account. Look below to see how much additional money you could save by making catch-up contributions (before-tax numbers).
- 4% annual return: $124,947
- 6% annual return: $148,035
- 8% annual return: $175,946
Have your financial advisor run “What If” scenarios in your financial plan to help you determine your maximum contribution and what the effect is on your retirement assets.
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1. Statistic Brain – Retirement Statistics, January 3, 2016
2. HelloWallet – Debt Savers in Defined Contribution Plans, October 2013
3. "TD Ameritrade – Self-Employed Retirement Savings Habits, June 2015"
4. Saad-Lessler, Joelle, Teresa Ghilarducci, and Kate Bahn. "Are U.S Workers Ready for Retirement?" Schwartz Center for Economic Policy Analysis, The New School, 2015.
5. IRS – Retirement Topics – Contributions, July, 2016