This past week I met with a few young investors that were new to investing. They were enrolling in their employer’s 401(k) plan. It’s important for new retirement plan participants to understand how their 401(k) works. But rather than trying to teach them all there is to know, teaching them where to find answers when questions arise is more beneficial. All plan participants receive a Summary Plan Description (SPD). This document should be the first stop for all administrative questions. All plans are not the equal so if a participant goes to a new employer, don’t assume all provisions of the plan will be the same. Review the SPD and keep a copy of it for future reference.
One thing that the SPD does not do is describe the investments, educate employees on investing and detail the fees that are charged to the plan participants. Employers will usually have a variety of investment education material and/or a representative that will offer assistance to plan participants. If fees are not detailed, ask for more information. In coming months, employers will be required to be much more detailed with fees. So don’t be surprised. Remember investing does have a cost.
After highlighting the structure of their plan for these new 401(k) participants, my first advice was to determine how much they could save in their retirement plan. If you don’t have a personal budget, it’s time to create one. There are lots of ways to do it, from websites to software programs, personal financial planners or just as simple as creating a list of your income and expenses from you bank statement. How much you spend monthly is referred to as your expenses, subtract that from your income. What is left over is referred to your discretionary income. New 401(k) plan participants should consider saving at least up to the limit of their company’s match on their retirement plan. If you have a match contribution from your employer and you do not meet that match, you are leaving money that you can never get back.
I always advise first time investors to start small. Usually you can increase your contributions quarterly. You can always go to zero at any time. Just contact your payroll department within an administratively feasible time period to stop payroll contributions. Remember though that you will not be able to start back until the next enrollment period. When that is, is determined by your company’s plan.
Once a new retirement plan participant determines how much they want to save in their 401(k) plan, it’s time to consider how to invest. Investing is a very individual topic. Don’t run into paralysis from analysis! If you don’t have enough time to determine how to invest your contributions, put them into your plan’s money market until you determine what is right for you.
Here are a few important tips on 401(k) money markets. Most money markets are paying little to nothing in today’s economic environment. Solely investing in a money market is usually not a core investment strategy for any long term retirement plan. An exception to this would be if the investor did not want the volatility of variable investments and the money market was the only stable value option available. FYI, if you are investing in a mutual fund money market, it DOES NOT have a guaranteed value. Don’t be surprised if the money market option for your 401(k) has a negative return. Some money market funds in 401(k)s are paying so low of a return that there is not enough interest to give a positive return after the plan’s fees. The concept is that the money market has a relatively stable value (not guaranteed) that will give you time to determine what type of investments you would like to choose for the long term. If you do not want the volatility of variable investments, consider any guaranteed options offered by your plan. Note that guaranteed options may have different exchange rules so look carefully before making this selection.
In my next blog entry, I’ll look at the three types of investment strategies: do-it-yourself, having someone do it for you and self-help options.
Securities offered through Triad Advisors, Inc. Member FINRA, SIPC
