Watching TV, I saw a Walmart commercial highlighting that it offered employees a 401(k) plan. What does that mean? I received a call from a University of Minnesota HR student looking for clarification on the same.
What is a 401(k)
A 401(k) is a way to save for retirement that reduces your current taxes. Many people invest that money in something. If you save for retirement outside of a tax deferred vehicle like a 401(k) you would pay taxes on your earnings. That tax rate could be as high as 39.6% or as low as 20%. Nice deal, huh.
Unlike an IRA, the ability to save is more than 3 times the IRA amount. Sweetening the pot further, unlike the IRA that has a phase-out based on income, there is no such phase-out for a 401(k). If everyone in your company saved to the max, the potential savings phase-out’s aka testing would be nullified.
The 401(k) essentially establishes how large your ability to save is, how it is taxed and some key creditor protections.
What is a “brand name” 401(k)
There are many companies advertising their brand name IRA or brand name 401(k). If all things were equal between employers would it matter to you that they had a brand name 401(k)? I hope not. Here’s why. Let’s say that you could go to two different grocery stores. One store only sold its name brand stuff and the other sold a mixture of their brand name stuff and a variety of other brands. Which one would you prefer? Let’s say for convenience, each one set up a mini-mart that narrowed down your choices? That effectively is what happens when your company picks investment choices for you to invest in. Now what? What if your employer picked the top 20 most invested in investments? Would that be good? That may result in both plans having the same investments.
How might an independent 401(k) differ?
Let’s say your employer hires a professional investment buyer (an investment fiduciary). Your investment buyer is paid the same fee no matter how they stock the mini-mart. Rather than be concerned what everyone else is doing, the professional buyer picks based on your needs and the needs of your fellow employees. Those needs would take into account things like employee investment knowledge, age, etc. Further, the professional buyer communicates your options and the thought process behind the choices.
Unfortunately, most 401(k) plans don’t hire an adviser that is investment fiduciary. However, you can hire your own investment fiduciary to help guide you through the process of how much to save, what to invest in and for how long. When interviewing potential retirement planners, ask them if they will be working in a fiduciary capacity. If they say yes, their back-up to the assertion would be they are registered as an investment advisor representative, CERTIFIED FINANCIAL PLANNER™, etc. I am partial to CERTIFIED FINANCIAL PLANNER™ professional as they can help you develop a retirement savings plan tied to the paycheck you want in retirement. Need I say, you could simply Contact Us?
This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.