401(k) Features, Core Funds and Self-Directed Accounts (SDA)

Traditional and Roth 401(k)s

A 401(k) is an employer sponsored plan designed for you to save money for retirement. There are two types of 401(k)s, traditional and Roth. A traditional 401(k) allows pre-tax dollars to be contributed.  These funds grow tax deferred, meaning you do not pay taxes until the money is withdrawn. A Roth 401(k) is where you contribute after-tax dollars.  Again, the funds grow tax deferred, however, you can withdraw the funds tax free.  In the traditional, you pay the taxes at the end.  In the Roth, you pay the taxes in the beginning. The plan that is best for you, depends on many factors. 

Matching Benefit

Aside from the benefit of saving for retirement, there are other benefits. One such benefit is your employer may have a matching program. This is where your employer may contribute, or match, some or all the money you contribute. This is like getting free money! Of course, all plans differ, so here is an example to explain how it may work.
 

The most common employer matching is either dollar for dollar (100%) or on a percentage basis. For example, let us say you earn $50,000 per year.  And you contribute 6% or your salary to the plan. This amount is $3,000. Your employer may also match that at 100% and contribute another $3,000 or only match 50% and contribute another $1,500.  Either way, your employer is contributing funds for your retirement. Just to point out, there is usually a cap on the amount the employer will contribute. It is important to check your plan and know the details of your plan. Regardless, we always recommend you maximize your contribution to take full advantage of your employer’s match.

Vesting

Please be aware, your employer’s matching contribution is probably restricted by a vesting schedule. Meaning, the longer you work for your employer, the more you keep of the matching contribution. The most common is a 5-year vesting schedule. Here you earn 20% of the employer match for each year of employment.  At the end of 5 years, you are 100% vested and keep all the employer contributions. Regardless, all your contributions are not subject to a vesting schedule.  They are yours and not subject to any restrictions once you leave the plan.

Core Funds

Next, we would like to discuss the investment options which may be available through your 401(k) plan. Specifically, we are referring to what is called core funds. These funds are selected by plans to serve a broad spectrum of employees. The pitfall of core funds is they may not suit your specific needs or goals.  

As investment advisors, we see many individuals who select a target date fund because it is the “norm” for the company. Others chose a target date fund because it is easier than doing a proper asset allocation. If you fall into this category, let us review your 401(k) and recommend an allocation that meets your goals and objectives. We may be able to move into investments outside of your plan and create a truly unique portfolio.  This is call a Self-Directed Account. 

Self-Directed Account (SDA)

A Self-Directed Account is a tremendous feature that is becoming increasingly more popular. Instead of relying on the handful of funds in your 401(k) plan, we now have the freedom to access all investments. Your contributions can be allocated to specific investments that align with your goals.  Instead of being limited to a small population of funds, we now have access to a broad spectrum of investments.   This is extremely powerful. 
Allow us to review your plan, and with our expertise, we will show you how to separate the remarkable investments from the ordinary. 

Retirement planning is too important to leave to chance.  Allow us to assist you in choosing the best path to a successful retirement.  It will be here sooner than you think.  Call us today.  We look forward to being of service.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Griffin Financial Advisors, LLC. The opinions expressed are those of Griffin Financial Advisors, LLC and are subject to change at any time due to the changes in market or economic conditions.