An employer retirement plan has to be one of the most under-rated employer benefits. It’s so often neglected and/or taken for granted. I’ll be the first to admit I treated it that way for the first two years of my career. It wasn’t until I got my second job working for a very small consulting company where I had to negotiate my own retirement package and employer match that I really began to see the importance of this benefit.
Whether you’re a new grad getting your first job, a few years away for retirement, or somewhere in between, I want to help you make the most of this crucial benefit:
Maximize the Match: Yes, this is the most common advice anyone receives about their employer retirement plan, but please don’t tune it out. Take full advantage of any employer matching dollars. It can make a big difference! Here’s how: Let’s say you make $50,000 per year and your employer offers to match up to 4%. You decide to put in 2% and your employer matches that 2%, which means you’re missing out on an additional 2% from your employer. Assuming an investment return of 6%, leaving the match on the table for 10 years could cost you almost $14,000 from your employer’s contribution. Over a 30-year career, that’s nearly $90,000 of free money! The craziest part? It would only be an extra $83 per month for you to contribute that extra 2% (about $71 per month if you contribute pre-tax, assuming a tax rate of 15%).
Tip: Can’t make your full employer match at this time? Contribute what you can and commit to increasing your contribution by 1% per year until you meet the match. Some retirement plans will even do this for you with something called an “auto increase.”
Invest with Your Goals in Mind: When you first start investing in your employer retirement plan you’ll be put in the default investment fund. Take the time to see if it’s really right for your investment goals. Get to know your risk tolerance, your time horizon (in other words, the amount of time until you retire), and your own retirement goals. See if your employer has sustainable and/or impact investing options.
Tip: Once you’ve decided on a particular investment mix, it takes some time and energy to make sure the mix stays the same over time. For instance, if you want to invest 60% of your portfolio in stocks and 40% in bonds and it’s a great year for stocks, you may end the year with 70% of your portfolio in stocks and 30% in bonds. This means you’ll need to sell some of your stocks and buy more bonds to keep that mix intact. This process is called “rebalancing.” Most experts recommend rebalancing your portfolio at least annually. Be honest with yourself about how much time and energy you want to spend on investing. Many employers now have options such as target date funds that will do a lot of this work for you. Even if you decide to go this simpler route, you still have to make sure you’re invested in the right fund to begin with.
Take the Helping Hand: Unless you are really interested in investing, it can be daunting to translate your personal needs into a specific investment portfolio. Take any education, coaching, or planning assistance your investment company offers, such as online tools and/or talking to a financial planner. Even if you are interested in investing, use these resources to get a second opinion to make sure you’re on the right path. This isn’t an area of your life where DIY is to your benefit. Your employer and/or investment company may also offer opportunities to further your financial education or work with a financial coach. Think of these opportunities as part of your broader employer benefit package — there’s no reason to pass them up.
Tip: Whenever you talk to someone about your investments, it’s important to understand their credentials as well as how they are compensated to ensure you’re receiving advice that’s in your best interest, not theirs. If possible, you’ll want to work with a Certified Financial Planner (CFP). They have a responsibility to put your needs first no matter how they are compensated. Regardless of their credentials, it's important to ask what their fee structure is. I know this question may feel awkward to you, but it’s a common question in this industry. If the person you are speaking with is at all thrown by the question, frustrated you asked, or answers in a way that leaves you confused, that’s a good sign you need to speak to someone else.
Investigate What Happens When You Leave: If you’re in a job — especially a job you really like — the last thing you want to think about is leaving it, but this is an important step in the process. For some employers, you have to stay a certain number of years before you are “vested;” in other words, until your retirement account — including your and your employer’s contributions — belongs completely to you. See how long it will take until you are vested. Similarly, if you are inching closer to retirement, get to know any options available for after you retire. Can you keep your money with the same plan? Do they have any annuity options? As you approach retirement age there will be a lot of investment companies that will be very interested in helping you manage those dollars. Understanding the options in the plan you already have before you consider rolling money over to another investment company will help you make a more informed decision. Be sure to research the fees your current plan charges and see if that might change when you are no longer employed there.
Tip: Depending on the company you work for, you may also have a pension available to you. If you do, use this Nerdwallet article to get to know this benefit and what questions you should be asking your employer.
While you’re taking a look at your own retirement plan, this is a great opportunity to take a deeper dive into your partner’s plan as well. If you’re self-employed, it’s a good idea to get to know your options.