Intro to 401ks and Other Employer Sponsored Retirement Plans

Jonathan Baird |


According to multiple organizations that provide statistical data, over half of Americans are covered by an employer-sponsored plan. The 401(k) is the most common, but there are lots of other plan structures out there. The 403(b) is very common in non-profits, Simplified Employee Pensions (SEPs), and SIMPLEs are very common in smaller businesses. These plans provide a great opportunity for employees to save up a significant nest egg for retirement. For those who are under age 50, it is reasonable to be concerned about the ability of the Social Security Administration to be able to fulfill their obligations to future retirees. Employer sponsored plans can help make up the shortfall that Social Security is likely to reckon with in the coming decades.

There are many questions about employer plans that you should consider before acting. Should you participate at all? This is the first and most fundamental question. If you are eligible and if there is a company match, wherein the employer offers some match based on your contribution, then you should definitely consider contributing. If there is no company match and you have significant debt (student loans, credit cards etc.) then you may want to delay participating.

If the plan has a Roth option, should you make Roth contributions or regular 401(k) contributions? As a reminder, the Roth option means that you will pay taxes on the money that you contribute to the Roth option, versus the regular 401(k) contributions, which are tax deductible in the year in which the contributions are made. The first consideration is whether you are in your peak earning years or not. If you are making more money today than you reasonably expect to make after retirement, then it would probably be best to make regular (tax deductible) contributions. If you are younger or in lower earning years, it probably makes more sense to opt for Roth contributions. Keep in mind that any company matches will go into the regular contribution bucket, meaning you will need to pay taxes on this money when it is eventually paid out to you.

Another important decision to make is how to invest the money that goes into the account. Most plans today have many options for investing, and it is difficult for someone without solid investment knowledge to decide which funds to put your money in. For most people, the best option may be a “target retirement date fund.” These options are a fund of funds that automatically adjusts the risk profile of the underlying investments as you approach your retirement date. If you don’t have access to investment advice through your 401(k) provider, the target retirement date funds are a great option for you.

There are many other issues to think through with an employer-sponsored plan, but these should be the most common questions that you should consider when considering your participation in the plan. This is not investment advice, each situation is specific and you should seek the advice of an adviser before making any moves. Happy retirement planning!

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.