Getting the Most Out of Your 401k Plan

I run a graphic design company with a small employee workforce of just eight people. However, since all my employees are of different ages, I am trying to find a 401k plan that is flexible enough to accommodate all of their investment styles. With this in mind, what should I be looking for in a 401k scheme?
Noah Scott, Denver, Colorado

Nowadays, there are variety of 401k plans available that offer a huge degree of flexibility, making it simple and easy for employees to save exactly the amount they wish to, while driving down their short-term and long-term risks. The government allows individuals under 50 to save up to $17,500 before tax, but 401k plan contribution amounts may differ, depending on the scheme you have chosen.

One of the most important factors to keep in mind is whether your company is going to provide matching contributions to its employees. Typically, employers in the United States offer as high as 50 cents per dollar saved towards a 401k plan, for up to six percent of an employee’s salary. This will become important because it will help your employees determine how much they have to save.

The next thing your employees will need to know is the kind of mutual fund portfolio that is most suited to them. Your employees mutual fund portfolios will need to reflect their investment styles. For example, individuals approaching retirement will need to not only contribute more towards their 401k plans, but may even need to be aggressive, opting for small and mid capitalization funds. For younger employees who can afford to put away lesser, adopting mutual fund families consisting of large cap options may be a better choice. Companies such as offer no load mutual fund families.

In order to determine whether their 401k plans are working consistently in their favor, your employees will need to frequently compare with major indexes across the world. If their 401k plans are consistently outperforming these indexes, it is a strong indication of a solid plan. The best 401k plans will also allow individuals to choose multiple mutual fund families so that risk is mitigated in case a single index experiences a downturn.

Finally, most 401k plans offer a ‘Stable Value’ option, as an alternative to the Money Market funds. Such options are portfolios that do not include any stocks, and offer low, but no risk, rates of growth. ‘Stable Value’ options are ideal for younger employees who need not take on too much risk, while saving for retirement. The ‘Money Market’ option offers higher short-term risk, but can also promise higher gains over shorter periods of time. Ultimately, the decision to choose ‘Stable Value’ or ‘Money Market’ options will boil down to your employees’ investment attitudes, as well as their total contributions.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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