U.S. investors hold $10.4 trillion in 401k assets as of the first quarter of 2022, making 401k’s far and away the popular choice of Americans saving for their retirement years.
With all that treasure stashed away in 401k plans, you’d think retirement investors would take the time to know exactly what’s in their retirement plans, so they can make informed investment savings and withdrawal decisions.
Sadly, that's not a trend.
In fact, one recent study from Dream Forward, a 401k plan provider, showed that 63% of 401k plan holders “don’t understand 401k’s and financial terminologies.”
As usual in the ways of finance, a little knowledge goes a long way.
So, while 401k plan providers typically don’t provide much-needed transparency on their plans, it’s up to plan participants to uncover so-called “hidden” realities about their 401 plans.
In the Dark on Key 401k Areas
Retirement planning experts say there are many 401k features and provisions that plan holders don’t have a good grip on, and that's a problem that needs immediate fixing.
These 401k areas of knowledge omissions are at the top of that "to-do" list.
Plan pricing. One of the biggest challenges that 401(k) plan participants have faced for years is non-transparent pricing.
“401(k) plan providers do share out information with participants - and are required to do so at least every 14 months, but the documents are often lengthy, hard to parse, and not overly clear,” said Eric Phillips, CFA and senior director at Human Interest.
One particular area of focus should be 401k plan fees, which can easily erode plan investment gains. “Even 1% in additional annual costs in 401(k) management could lead up to a 25% or greater reduction in savings at retirement,” Phillips said.
Roth flexibility options. Another key aspect of 401k's that employees/people don't know about is the ability to contribute to a “Roth-like' option in their 401k plans.
“Many large companies allow a Roth investment option although some small companies may not,” said Arvind Ven, CEO, of Capital V Group, a financial planning firm. “If you qualify, this 'mega back door ROTH' allows 401k investors to contribute, potentially well in excess of normal ROTH contributions, which allow for contributions of $6,500 or $7,000 (if over age 50) annually.”
Whether their plan investment fits their long-term investment goals. One major 401k plan element is hidden in plain sight – the asset allocation and underlying investments of managed funds.
“With the popularity of target date funds/target risk funds and auto-enrollment, people know very little of what they are invested in,” said Paul Swanson, vice president of retirement at CUNA Mutual Group. “Unfortunately, most 401k investors don’t take the responsibility to ensure the investment matches their personal goals and tolerance for risk.”
Lifecycle investment risks. Another hidden facet of 401k plans is not understanding the lifecycle style of investing, which is a common strategy in retirement plan funds.
“These are the funds that have a year on them, such as 2025 or 2030,” said Teresa Arrigo, a financial advisor at GenWealth Financial Advisors. “If investing in individual funds is overwhelming for 401k plan participants, these funds can be a great way to invest and achieve a level of diversification.”
However, what many don’t know is that the bond-to-stock ratio changes on its own with lifecycle funds.
“A fund that’s 15 years or less from its named date has a much higher bond percentage than many expect,” Arrigo said. “When the fund was selected, the participant probably noted that there was a large amount allocated to growth. What they may not know is that the fund shifts to a more conservative allocation over time.”
Plan rollover miscues. Many 401k investors don’t realize that when you leave a company, it's a mistake to withdraw 401(k) funds directly.
“When you leave a company, don’t withdraw your 401(k) funds directly as that can incur significant fees,” said Mindy Yu, director of investing in Betterment at Work. “Instead, take the opportunity to roll over your 401(k) to a new employer’s retirement plan or to your own IRA account. We recommend doing this via direct IRA transfer or direct 401(k) rollover via check.”
Time to Get Educated on 401k Plans
How can 401k investors truly learn more about their own 401k plan?
The best way to learn more about your individual 401(k) plan is to reach out to your HR/benefits team.
“Your company’s benefits specialists should have all the information that you need in order to make sure that you’re signed up correctly, contributing an appropriate amount, and fully understand the benefits that they are offering (such as whether your employer offers a 401(k) match, and whether you’re contributing enough to meet that match),” Wu said.
If your company leverages a retirement provider or financial advisor to manage and administer the 401(k), they may refer you to another party in order to get all of the insights you need.
“It’s important to get educated on your 401(k) so that you have a good sense of how the offering works and whether you’re on track for a well-funded retirement,” Wu said.
