Resource Type: Resource Post

Employer matching contributions–Don’t leave anything behind!

Posted on June 6, 2020 by -

It’s not very often in life that someone will pay you to save money, but a 401(k) match is one of them. A 401(k) match is when an employer contributes, dollar-for-dollar, the same amount you put into your 401(k). Many employers offer this benefit up to a certain limit (e.g. 6% of your annual compensation).

That means the more money you contribute each pay period (up to the limit), the more of a match you get. And the more of a match you get, the more money you have to invest and the faster your investments grow because of compound interest. So if your employer offers any type of matching, you should try to contribute up to the matching limit so you don’t leave any money on the table.

Alternatively, your employer is not required to match your 401(k) contributions or it might require you to work for the company for a minimum period of time before you get to keep all of the contributions they’ve made on your behalf. The process of releasing the contributions made on your behalf is called vesting. Many companies will have incremental vesting thresholds, so the longer you work for them, the greater the percentage of their contributions you “own”. 

Matching formulas and policies vary from company to company so if you have any questions about your company’s plan, reach out to your manager or HR department.

* This illustration is a hypothetical compounding example that assumes biweekly deferrals (for 30 years) at a 7% annual effective rate of return. It illustrates the principle of time and compounding. It is not intended to predict or project the investment results of any specific investment. Investment returns are not guaranteed and will vary depending on investments and market experience. If fees, taxes, and expenses were reflected, the hypothetical returns would be less.

Fired or laid off? What you should do with that 401k

Posted on June 6, 2020 by -

Losing a job is a stressful experience. Adding to that stress is the decision you’ll have to make about what to do with your 401(k). The good news is that retirement plans are portable. That means you can take your nest egg with you when you leave a job. Let’s look at the options available to you:

Transfer to your new company’s plan. When you start a new job, you can move the money from your previous employer to your new employer’s retirement savings plan (if they offer one). Not all plans accept rollovers, so you’ll need to check with your new employer.

Roll over your old plan to an IRA. You can move your retirement savings from a previous employer to an IRA without paying taxes or penalties. If you roll your money over to an IRA, you can continue to save for retirement while you look for new employment or start working for yourself.

Icon is an IRA and accepts rollovers. You need to first open an Icon account and then we can help you with the process of rolling over your funds.

Don’t cash out. Whatever you do, don’t cash out your savings, even if you think it’s a small amount. Not only will you have to pay taxes and an extra 10% early withdrawal penalty, but you’ll also lose out on your future savings.

 

* This hypothetical example assumes the following: (1) One annual $5,500 IRA contribution made on January 1 of the first year, (2) annual rate of return of 7%, and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Earnings and pretax (deductible) contributions from a traditional IRA are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free, provided certain requirements are met. IRA distributions before age 50-1/2 may also be subject to a 10% penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for a 7% annual rate of return also come with risk of loss.

Auto-escalation–A great idea

Posted on June 6, 2020 by -

Many companies are now offering auto-escalation in their 401(k) plans. With auto-escalation, your contribution level is automatically increased at regular intervals, typically 1% a year, until it reaches a preset maximum. 

Another version of this is a program called SMarT, which stands for Save More Tomorrow. Under the SMarT program, employees agree today to increase their 401(k) contribution rate in the future, generally when they receive their next raise. SMarT is an easy, painless way to set yourself up for regular contribution increases that coincide with pay increases, so you don’t feel the pinch of saving more.

If either of these automatic savings options sounds attractive to you, ask your employer whether your plan has an auto-escalation or SMarT feature.

 

The impact of high fees on savings

Posted on June 6, 2020 by -

We often associate high cost with high value, and while this can work for cars, phones, and other goods and services, it is not true for the fees you pay to manage your investments. In fact, high fees have a corrosive impact on your savings.

Over time, high fees will eat away at the value of your account, leaving you with less money in your retirement years. To understand how fees affect you, the individual investor, consider the following example:

Types of fees

If you are in an employer-sponsored plan such as a 401(k), 403(b), or 457 plan, you can expect to pay the following fees.

Investment fees. These are the fees charged by mutual fund companies to pay for the costs of managing 401(k) plan investments. These are the largest fees you pay and are charged annually as a percentage of your account balance.

A typical percentage is 0.63%, but it isn’t uncommon to find fees ranging from the low end of 0.25% to well over 1.3%.

Plan administration fees. These are the expenses involved in the day-to-day operation of running a 401(k) plan, including recordkeeping, accounting, online access, and customer service. The administration fees may be charged by the financial company that manages your plan investments (the “plan provider”) or by an outside company hired by your employer to handle the administration of the plan.

To ensure you have the most money available to you in retirement, you want to look for an investment vehicle with low annual fees. If your employer doesn’t offer a 401(k) fund with low fees, consider rolling your savings into a low-cost IRA like Icon.

 

* All figures in 2012 dollars. Workers are assumed to begin saving at age 25 and retire at age 67. Example reflects median salary of $30,502 when worker starts saving at age 25. Example provided by CAP.

Naming a beneficiary

Posted on June 6, 2020 by -

Retirement accounts allow you to name “beneficiaries,” or people or organizations that will receive your retirement savings in the event of your passing.

Selecting beneficiaries is an important step in securing the future of your savings. If no beneficiaries are indicated and you pass away, your retirement account must go through the complicated probate process instead of going directly to your loved ones or preferred organizations.

How to designate a beneficiary. Most financial institutions make the process of selecting beneficiaries easy by providing you with a straightforward form that allows you to indicate one or more desired beneficiaries, and the percentage of money they should receive in the event of your passing. There is typically no limit to the number of beneficiaries you can indicate, so you can allot different amounts to several recipients of your choice. People generally choose their spouse or children; however, siblings, close friends, other individuals, or organizations can be selected as well.

Beneficiary forms usually require some basic information about the intended beneficiaries, as well as their Social Security or tax ID. The requirements to designate a beneficiary or beneficiaries vary by company so it’s a good idea to ask the servicer of your retirement savings about its specific policy.

Why you should review your 401k statement

Posted on June 6, 2020 by -

How to read your 401k statement

Your 401k statement could be overwhelming and filled with incomprehensible jargon, but knowing what to look for can make reviewing your statements a quick and painless process. The layout can vary by company, but they will all feature the same basic information.

Your “account summary” will feature your account balances, the funds, etc. you’re currently invested in (often called your holdings or asset allocation), and a summary of recent transactions.

An “account balances” section should indicate your “return,” or the amount your investments have increased or decreased in value. This may be listed as a dollar value, a percentage, or both. It should also indicate a “starting” or “beginning” balance, which is how much money you started with at the beginning of the statement period (a month or a financial quarter). It should also note any taxable or nontaxable income, which will be of use to you when tax season comes around.

The “holdings” section indicates what you are invested in. This can be stocks, bonds, mutual funds, index funds, or other financial products. Statements vary in the level of detail they provide; some will tell you precisely what stocks you own, while others will simply tell you your “asset allocation,” or what percentage of your money is invested in stocks, bonds, and cash.

Your recent transactions section should indicate any purchases or sales of assets, as well as contributions to and withdrawals from the account. You should keep an eye on this section to make sure nothing strange appears (e.g., large sales of stocks or bonds, selling and then buying the same stock, or cash withdrawals you don’t remember taking).

There should also be a section that exclusively covers “performance,” which reviews how successful your investments have been. This section should provide detailed information about how each of your investments is performing, and compare their performance to that of the market overall (this is usually done by comparing your returns to those of a major index such as the S&P 500).

By staying informed about your retirement plan’s performance, you ensure that your investments are inline with your retirement strategy and that you’re on track to meet your retirement goals. If your plan isn’t performing how you’d like, consider rolling your savings into an Icon IRA. With 100s of investments to choose from and low annual fees, it’s the easiest, low cost way to save for retirement. 

Changing jobs? What to do with that 401k

Posted on June 6, 2020 by -

You can keep the money in your current plan or you can roll it over into a new retirement account. Each option has its advantages.

Let’s figure out the right one for you.

Leave your balance with the old plan. You can keep your money with your current 401(k) plan as long as your balance is at least $5,000. But you won’t be able to make contributions, and you’re still subject to the plan’s rules and limited investment choices. This may be a good option if you’re between ages 55 and 59 ½ and you’ll need your retirement savings soon.

Roll your old plan over to your new employer’s 401k plan. This can be a good move if you’re happy with the new plan’s investment choices and fees. Especially if your new employer offers contribution matching. Find out if your new employer’s plan accepts transfers; not all do.

Roll your old plan over to an Icon plan. You can roll over your old 401k into Icon plan. Be sure to do a direct rollover so that taxes are not withheld. You can continue contributing your retirement, regardless of whether you’re “traditionally” employed.

Cash out your 401k. NOT RECOMMENDED. If you take a “lump-sum distribution,” you will have to pay income taxes on the money. You will also pay a 10% early withdrawal penalty if you’re under age 59 ½. Not only do you lose money, but you lose valuable time in building savings, which you might never catch up.

 

Why you should save early and often

Posted on June 6, 2020 by -

If there is a magic ingredient to successful investing, it’s time. Quite simply, the earlier you start saving, the better.

Don’t make the mistake of thinking that you don’t earn enough money to save, or that retirement is too far away. Even saving a little bit adds up over the long term. So no matter your age, or how much you earn, now is the time to start saving in a quality retirement plan. Waiting even a few months could mean less money in your nest egg when you retire.

Why? It’s all about the power of compounding.

Compounding allows you to make money not just on the money you contribute, but also on the money it earns (the “rate of return”). So if you invest $100 and it earns a 5% return in one year, you now have a principal of $105. The following year, if you also earn a 5% return, you earn it on $105 (not just the initial $100) and you now have $110.25. As your principal grows, your gains will grow, too, compounding your returns. The more time you have until retirement, the longer the magic of compounding can work, growing your savings faster than you imagined.

Even a small amount set aside each month has the power to grow exponentially over the years. Especially when you start young.

** This example assumes an annual income of $25,000 (without increases), 6% contribution, 8%–10% rate of return, and monthly compounding. This chart is for illustrative purposes only and is not intended to represent the performance of any specific investment. Actual returns will vary and principal value will fluctuate. Taxes are due when money is withdrawn.

What’s an ETF?

Posted on June 6, 2020 by -

ETFs are referred to as “funds” due to their similarities to mutual funds. However, ETFs are traded on the stock exchange. Unlike a stock, which focuses on one company, an ETF has a wider range of focus. An ETF is a fund or security composed of a collection of other securities such as stocks and bonds. It’s constructed similarly to a mutual fund, but is traded on the stock exchange. An ETF often tracks indexes and is able to trade throughout the day unlike mutual funds which trade once per day. An ETF has an associated price that allows the purchase and redemption of shares to occur easily.

ETFs are also known for being low-cost investment options. ETFs can consist of hundreds or thousands of stocks and bonds. To obtain that type of diversity, an investor would incur a large number of trading transaction costs and be forced to meet some high minimum purchase requirements in a lot of cases. ETFs can be utilized as a way to obtain that diversity at a low cost. ETFs are less expensive than mutual funds because they do not charge 12b-1 fees or commissions. Therefore, fewer operational expenses lead to reduced expense ratios for the investor.

 

 

 

Thinking of consolidating old 401(k) plans?

Posted on June 6, 2020 by -

Generally speaking, it makes sense to consolidate old 401(k) and 403(b) plans into one place. But there are a couple instances when it might make sense to leave your money where it is. Let’s look at both cases.

Advantages to consolidation:

Simplicity. Having all of your money in one place makes it easier to manage your investments, as you have to pay attention to only one account.

Fees. One account is almost always less expensive than multiple accounts.

Investment freedom. If your money is with an old employer’s plan, you are limited to the investments available in that plan. If you invest in an IRA, you have more choices.

Safekeeping. It’s not uncommon for people to lose track of their old plans.

Why you might want to keep your separate accounts:

Low fees. If your previous employer has a great plan with low fees, it might make sense to leave your savings in their plan, especially if you are nearing retirement.

Tax reasons. In rare cases, there could be good tax reasons to leave your money behind.

To decide if consolidating your retirement accounts is right for you, look at your personal circumstances and consult a tax advisor if necessary.