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Why a 401(k) plan is a good idea for those just starting out

“Honey, don’t put it off. You need to put your money to work for you now by contributing to your company’s 401(k) plan for retirement.” That was the advice from one dad to his 25-year-old daughter after she accepted the job offer. He didn’t need to remind her how quickly her working years will fly by.

Dad gave solid advice. A company-sponsored 401(k) retirement plan, also known as a defined contribution plan, is today’s most popular employer-sponsored retirement plan. So much so that more than 50 million workers actively participate. And that includes millennials strapped with student loan debt and those starting families.

So when joining a firm that offers a retirement plan, take full advantage of it by contributing as much as you can without disrupting your living expenses. And also keep in mind how fortunate you are. Employers are not required to offer retirement plans, nor make matching contributions.

Learn as much as you can about your plan

For many workers, investing for retirement roughly 25 to 30 years down the road is a daunting task – which explains why these are the most asked questions:

·         “What do I invest in?”

·         “How much do I put in?”

·         “Will I retire with enough?”

·         “Wait. Should I be doing this myself?”

This last question is the most important one. With numerous company plans offered by Fidelity, Principal and others – the administrators of the plans – there is no real guidance to the pre-packaged investments you choose from, so you’re on your own.

Basically, the financial counselors at these companies offer technical advice. They do not act as your financial advisor and do not monitor performance. They will make changes and rebalance your account if you ask – or if the administrators or plan sponsors authorize a general rebalancing based internal changes or market activity.

However, the plan documents and performance charts to create your portfolio are consistent with fund performance you might already know or can easily research.  You get the gist of the basic functions of the mutual fund plans and how they are invested by sectors and percentages, such as 60% stocks, 40% bonds, as examples.

This might explain why FINRA, the regulatory body authorized to protect investors, states: “It’s your responsibility to find out how the choices differ from each other and what each of them could contribute to your portfolio.”

Taking responsibility for your own retirement planning is good advice, and your Hefren-Tillotson advisor is well qualified to assist you by simplifying the choices and cutting through the clutter of company retirement plans with you.

It couldn’t be any easier. Or could it?

Regardless of age, it is important for you, as a company employee offered a 401(k) plan to take advantage of long-term tax-deferred investing. To participate, you simply dedicate a specific dollar amount to be taken out each pay period and directly deposited into your 401(k), establishing an investing discipline. This benefits you long-term because:

1.      It’s automatic. You don’t “see” the withdrawal taken from your paycheck because you’re not writing a separate check or physically making a deposit, so you don’t feel it, as such. You can also increase or decrease contributions. 

2.      It’s routine. Dollar-cost averaging and compounding are at work for you. Do your part, and they’ll do theirs.

Add in your company-matched contributions, 4% perhaps, typically earned after a stated period of time on the job and you’re literally contributing your employers’ “free” money to help fund your future.

Also, know that your 401(k) is not a savings account; it is a retirement plan similar to a pension plan for tax-deferred growth that employers (the plan sponsor) must administer and follow to the letter of the law. It is named after a section of the Internal Revenue Code.

Markets fluctuations are normal

Mutual fund values within your 401(k) plan will fluctuate. Mutual fund managers will dollar-cost average, that is, buy fixed (or equal) shares of company stocks, bonds, index funds or other securities for your portfolio on a regular schedule. In down markets, when everything is “on sale,” as advisors often times say, managers purchase more shares at lower costs.

In addition, earnings from investments within your 401(k) are reinvested for the purpose of generating even more earnings in what’s known as compounding.

Ultimately, with time, attention and a keen eye toward your future, a 401(k) can be an integral component of your overall financial success. Depending on your future situation, taxes can sometimes be deferred indefinitely, or at least taxed at some lower rate in the future.

Investing, like retirement, is about time and money. As you think about and plan for yours, ask yourself which would you like more of.  We can help.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.
Hefren-Tillotson

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Hefren-Tillotson Inc. is a leading diversified financial services firm providing investment and retirement plan management and comprehensive, financial planning through MASTERPLAN® for individuals and businesses. The firm’s wealth management services are administered by Certified Financial Planner (CFP) professionals, Chartered Financial Analyst (CFA) Charter holders, attorneys, Chartered Life Underwriters, and CPA/PFS’s. Hefren-Tillotson offers corporate services including 401(k) retirement planning, executive financial counseling, fiduciary reviews and workplace financial planning seminars. Founded in 1948, the firm is headquartered in Pittsburgh and has offices located in Pittsburgh, Butler, Greensburg, North Hills, and South Hills. MEMBER SIPC.