If your 401(k) is starting to resemble your dusty, cluttered garage, you might want to give it a clean-up. Chances are it will reap you the reward of more money sooner, says Tom Zgainer, founder and CEO of Americasbest401k.com. Zgainer recently told Yahoo Finance about the easy ways you can make sure your 401(k) is performing up to its potential.
Give yourself a 401(k) raise
Zgainer says most American workers who have 401(k) plans never change the rate that they contribute from the time they first open it. What participants should be doing, he says, is adjusting their contributions so they account for both inflation and their increasing earnings over the course of their career.
“You want to make sure that on an annual basis you give yourself a 401(k) raise, maybe at the same time you get a raise from your employer,” he says.
Look for hidden fees
Be warned that there could very likely be hidden fees eroding your savings over time within your 401(k) plan. The way to find these fees and eliminate them is to look at the fee disclosure form every employer is required to provide. If you can’t figure out the fine print, Zgainer recommends having a financial professional look through it for you, so that you can flag any unnecessary fees and bring them up to your employer.
Get rid of poor-performing funds
A problem with 401(k) plans, Zgainer points out, is that employees are restricted to using the provider their employer has chosen. “You're screwed as an employee, because you have this lineup, this menu. You're restricted to using the provider and the fund investments that are in front of you,” Zgainer says. “If you do some digging on your own,” he says, “and you find that there are poor-performing or very expensive investment options, go to your employer and ask them, ‘why do we have this plan?’”
Your fee disclosure form often includes two columns. One will be 12B1 fees. Zgainer calls that out as a fancy term for commissions being paid to some third party. “The reason you have funds in your plan is not necessarily because they're the best, it's because they were placed in there to ensure third parties can get paid,” says Zgainer. And those payments are taking away from your savings.
If your employer won’t consider changing plans, Zgainer suggests contributing enough to get your employer match if there is one, and putting the rest of your dollars into an individual retirement account, which will put you back in full control of any money that’s not being matched by your employer.
Zgainer adds that it can only benefit you as an employee if you ask questions and prompt your employer to use a provider that offers options beneficial to the greater good of the company’s workers.
Become a 401(k) millionaire
When you hear the term “401(k) millionaire,” Zgainer says that is really a group of people who started saving early and consistently. “If you start saving $500 per month when you’re in your 20s and you have an accumulated average in return rate of say 7%, and you've really minimized your fees, when you wake up in your early 60s, you're going to have well more than a million dollars put away,” Zgainer says.
This happens through the magic of compounding interest, which Zgainer calls the eighth wonder of the world. “You didn't have to do much. You just really had to keep plowing that money away, and let it grow, and then you wake up one day when you stopped working, and instead of saying is that all there is, you start to say, ‘You know what, this is going to be a really cool life after my active work life is completed.’”
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