If everything about your employer’s retirement account feels overwhelming, that’s because it probably is. Which funds to pick? Are the fees reasonable? Should you roll accounts from previous jobs into your current plan?
The answers to these questions, and more, come down to whether you have a good plan or not. But how do you figure that out?
Is it a good plan?
A “good” plan is generous, in that it offers a significant match and a wide range of investment options. The match is what you get from your employer in proportion to what you put in yourself. The more your employer puts in, the more you should up your contribution to take full advantage. Be careful, though, because employers often cut these benefits when the economy turns south; maxing out the employer match can be a moving target, and sometimes the lower salary that results from pursuing a higher match might not be worth it.
Are the investment choices appealing?
Another key feature of employer plans are the investment options. You are likely automatically invested in a default fund chosen by the plan’s sponsor. It is worth reviewing what that fund, or funds, are invested in and what their fees are. Ideally, you don’t want to pay more than 0.5% in fund management fees. If you are paying more, consider switching to another fund. If you decide to shuffle funds around, don’t try and time it—you are in this for the long haul and diversification is the most important thing. Consider index funds invested in many different stocks, at home and abroad, as possible.
Most plans also offer target-date funds, which shift from stocks to bonds as you age to hedge market risk. This can be a good option if you aren’t paying hefty fees for it. If you are, divide your assets between a stock fund and bond fund and check in once a year to adjust the balance.
Some plans offer more complicated options. And due to recent and forthcoming regulations, you may be offered an annuity. If it is a simple, low-cost, life annuity, this may be worth considering after, or just before, you retire because it offers stable, predictable income. Just make sure you aren’t paying large commission fees.
Am I paying too much in fees?
Speaking of costs, management fees aren’t all you pay. There are also administrative fees, which tend to be lower for large firms that can spread costs over many employees. These fees can be very high for small employers, sometimes more than 1% a year, which really add up over time. A new executive order may lower these fees in the US.
The administrative fee may be added on to your management fee or deducted from your investment returns. Some employers pay the fee, though the odds are that the money is taken from somewhere else—like your salary or your match. However, if you leave your job and stay in the plan it can be a boon if your former employer still pays the fee.
Should I take a plan with me when I change jobs?
There are generally two times you give your retirement plan a lot of thought: when you start and end a job. You may have several retirement accounts scattered around, reflecting your long employment history. You have the option of consolidating plans or switching them into personal accounts, like an IRA in the US. It may seem inefficient to maintain several plans, but if you are paying low fees and like the investment options, there is no harm in leaving savings in accounts you opened with previous employers. The money belongs to you, regardless of where you work.
How do I make sense of all this? Who can I turn to for help?
The US Department of Labor has a checklist (pdf) to assess the suitability of your retirement account. But it involves wading through pages of plan documentation. If you don’t want to do this—I don’t blame you—get your HR representative to walk you through it. These are the key questions to ask:
- What do the different investment options cost?
- What is the employer match?
- What are the plan administrative fees and who pays for them?
The answers should be clear and easy to understand. There is a chance they won’t be, or that HR will direct you to arcane documents. Don’t give up: keep asking until you find someone—at your company or the plan’s sponsor—who can explain things in terms you understand.