Hewitt Associates Offers Workers Seven Simple Do’s and Don’ts for Maximizing Their Nest Eggs
It’s that time of year again: tax season. While most Americans may prefer to file their returns and put their finances on the backburner until next year, Hewitt Associates, a global human resources consulting and outsourcing firm, believes now is an ideal time for employees to review their 401(k) plan and make sure they’re on track for retirement. In many cases, workers might find they can take a few relatively simple steps to substantially increase their nest egg and reduce their IRS payments for next year’s tax season.
“For many workers, thinking about saving for retirement can be overwhelming,” said Pamela Hess, Hewitt’s director of retirement research. “What they don’t realize is that there are a number of simple actions they can take—and a few they can avoid—that can significantly impact their nest egg and help them meet their long-term retirement goals.”
Hewitt offers Americans a few simple savings do’s and don’ts that can make a significant impact on their 401(k) plan balances:
Do participate in your 401(k): Contributing to a traditional 401(k) plan actually lowers your taxable income for the year by allowing you to contribute pre-taxed money directly from your paycheck. This money grows tax-free until you retire or you start withdrawing funds. And chances are quite good your employer offers one! Hewitt research shows that the overwhelming majority of mid- to large-sized companies—96 percent —offer a 401(k) plan to their employees, and nearly three in ten (29 percent) offer a Roth 401(k).
Do increase your contribution rate: Did you know that contributing just 1 percent or 2 percent more of your salary to your 401(k) can have a dramatic impact on your retirement savings? For example, a 30-year-old employee earning an average salary of $50,000 who increases his/her contribution rate from 4 percent to 6 percent will have accumulated an extra $295,000 by the time he/she reaches retirement age. That same worker can save an extra $881,000 at retirement by regularly increasing his/her contribution rate in this manner throughout his/her career1. Many employers (59 percent) offer contribution escalation—where you can increase your contribution rates automatically and gradually over time without having to take any additional action.
Do put your plan on autopilot: Whether it’s because the process is too confusing, too time consuming, or both, the majority of Americans take a back seat when it comes to managing their 401(k) plans. Most employers today offer tools and features that take the guesswork out of saving and investing. Check to see if your employer offers target-date funds or automatic rebalancing tools, which can ensure you have a balanced mix of funds in your plan.
Taking advantage of these tools and features can potentially increase your retirement savings by 50 percent or more over the course of your career2.
Do take advantage of advice: According to a joint study from Hewitt Associates and Financial Engines, a leading independent investment advisor providing retirement help, the median annual return for employees using investment help was almost 2 percent higher than those who did not. Not sure where to start? Many employers offer services and tools that can help you make informed investment choices based on your particular needs. Hewitt research shows that about half (51 percent) currently offer online investment guidance, and 39 percent offer online, third-party investment advisory services. In addition, 28 percent of employers currently offer managed accounts, which lets you delegate the overall management of your account to an outside professional.
Don’t give up free money: Did you know that more than a quarter (28.2 percent) of workers cut their retirement savings short by contributing below the company match threshold? Make sure you’re contributing enough to your 401(k) to receive your full employer match. A 30-year-old employee earning $50,000 in 2010 can save 50 percent more at retirement if he or she contributes enough to his/her retirement plan each year to get the full company match3. And there’s good news even if your employer cut your match during the past two years. Hewitt research shows that 80 percent of employers that reduced or suspended their match in 2009 plan to restore it in 2010.
Don’t cash out: If you’re changing jobs or leaving your current job, don’t cash out your 401(k) savings. According to Hewitt research, 46 percent of employees do cash out, sacrificing potentially hundreds of thousands of dollars in retirement savings. For example, if you cash out $5,000 now, you will pay full taxes on that balance, plus a 10 percent early withdrawal fee. Keeping that $5,000 invested in a 401(k) plan can potentially turn into more than $50,000 at retirement.
Don’t overinvest in company stock: It’s a common temptation for employees to invest a significant portion of their 401(k) money in their employer’s stock. However, this can be a risky move. Even well-respected companies slump or stagnate for a period, while some even go out of business. It’s important to revisit your 401(k) plan portfolio and make sure you are investing no more than 10 percent of your assets in any single fund, including your employer’s stock.