Are your 401(k) dollars in the right place?


With the disappearance of traditional pensions and with retirees living longer, building the value of your 401(k) account while you’re working is more important than ever. And recent statistics confirm that Americans are doing just that, as the number of people with at least $1 million in their 401(k) accounts has grown by 25% so far this year. The 401(k) continues to play a major role for many retirement savings plans, as the average savings rate this year equals 13.9% of pay, including employer matches.

While investment selections and savings rates may impact how your 401(k) account grows over time, the location of those dollars could also have an impact. Consider whether you have a sound plan for the location of these funds by viewing them in the context of the Past, the Present, and the Future.

The Past

Understand your options for old 401(k) accounts.

If you’re like many employees out there, you’ve worked at a few places over the years. As advisors, we often see cases where individuals have one or more “old” 401(k) accounts from prior employers remaining in those company’s respective plans. The assets in these accounts are often the result of strategies established at an earlier stage in your life.

There are several options for these old 401(k)s including transferring those funds into a rollover IRA account. Other options, noted below, can provide a pathway for better integration into your current financial plan.

The Present

Maximize your current 401(k) plan.

So, you’ve been employed at the same place for a few years and are contributing consistently to your employer’s 401(k) plan. While you’re employed, there are generally three options for the location of your dollars:

  1. About 40% of 401(k) plans offer a self-directed option, which permits those funds to be maintained in a brokerage account under the plan. This type of structure usually permits the ability to hire a professional advisor for this account – a fiduciary that works for you, not the plan. While there may be some modest restrictions on investment selections, there are more choices than those available under the plan’s often limited selection. The ability to receive professional advice and more investment options provide you the ability to integrate these funds into an overall financial plan.
  2. About 70% of 401(k) plans offer the ability to take what’s called an in-service withdrawal. When the participant is at least age 59 ½, the withdrawal can be made into a rollover IRA without tax or penalty. This approach has all of the benefits of the self-directed option but may be available in some plans that do not offer a self-directed option. There would also be no restrictions on investment options in the plan since the funds would now be entirely outside of the plan.
  3. The third option is when neither of the first two are available: make the best of the existing plan options. If you already have a relationship with a financial advisor, ask them about your 401(k) account statement and investment options. Some advisors may be able to report 401(k) accounts on a consolidated statement with other accounts they are managing or provide guidance on how to allocate the account. Many participants simply choose what is known as a target date fund or life cycle fund, which are mutual funds that adjust the mix of assets based upon the participant’s age or chosen retirement date. These funds may accomplish your goal in some cases. However, one major shortcoming is that these funds don’t make adjustments for assets outside of the 401(k) account. For example, the target date fund could decide, based upon your age, that 40% of your account will be held in bonds. However, the fund has no way to factor in how much you already own in bonds outside of the 401(k). This is an example of where a professional advisor can provide guidance tailored to your situation and goals.

The Future

Looking ahead, pay attention to these three considerations.

  1. Catch-up provisions. For 2023, the maximum plan contribution is $22,500; however, if you are over 50 years old, you can contribute an additional $7,500 for the year known as a catch-up provision. For 2023, these catch-up dollars are also pre-tax dollars, the same as the regular contribution.
  2. Adjustments to your 401(k) account’s asset allocation. There are a variety of situations and life transitions that could trigger the need to re-evaluate the asset allocation within your account. An inheritance, marriage, divorce, sale of a property, or simply the accumulation of funds over time – any of these factors (and more) can happen over the years and impact the overall allocation of your assets.
  3. Required minimum distributions (RMDs). There are a variety of rules governing when you can withdraw funds from the account, when you must start withdrawing, over what time period, and how this is taxed. This is an area that should involve guidance from both a tax professional and financial advisor.

In addition to where you place your 401(k) assets, there are other factors that should be taken into consideration, such as contribution rates, investment strategies, and taxes, just to name a few. Consider seeking the guidance of investment and tax professionals now to avoid any unwelcome surprises as you approach your future retirement.

Jay Pelham, CFP®, is President at Kaufman Rossin Wealth, LLC, a Registered Investment Adviser.

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