Ten Steps to 401(k) Success

Ten Steps to 401(k) Success

ANNAPOLIS, MD – 6/29/2021 – The 401(k) plan is becoming the single largest source
of retirement savings for a majority of American workers. According to the Society of
Professional Administrators and Recordkeepers (SPARK), over 55 million people
participate in 401(k) plans. If you participate in a 401(k) plan, the good news is that you
have more control over your retirement money. The bad news is that you have more
control over your retirement money.

For people who do not have the time or the financial knowledge, properly managing
your 401(k) plan can be a daunting task. Moreover, if you do not manage it properly, the
401(k) can become, at best, a savings account and, at worst, a high-risk gamble with
your retirement money.

Members 1st Credit Union, a 401(k) advice and asset management company,
recommends ten steps that have helped thousands of corporate employees succeed
with their 401(k). If you lack the time or inclination to manage your own account, they
will actively manage it for you. However, if you are the do-it-yourself type, these ten
steps will help.

1. Participate
The dollars in your 401(k) plan may represent 20-80% of your income at retirement. The
government, and by extension, your employer, are giving you the opportunity to take
advantage of two very powerful financial concepts: the ability to save money on a pre-
tax basis, and the tax-deferred, compounded growth of those dollars. A 401(k) may
enable you to build a better nest egg than anything else you can do on your own
because of that tax-deferred growth. Saving money before it is included in your taxable
income reduces your annual tax bill. In addition, the earnings can grow on a tax-
deferred basis, meaning you can earn money on your earnings! If your company offers
a 401(k) plan, you need to be contributing, as soon as you can, and as much as you
can. It is the first step in taking charge of your financial future.
In order to help you increase the size of your nest egg, as well as to encourage
reluctant employees to save for retirement, many employers offer matching funds. The
average employer offers a match of 50% of the amount you contribute up to 6% of your
eligible salary. In the complex world of finances, we call this free money. If your
employer is willing to give you money, you need to take it!

Ten Steps to 401(k) Success

The only catch is that you must contribute some of your own money in order to receive
the company match. If your employer matches up to 6%, you should be contributing at
least 6%. The goal is to capture the entire company match (and then keep working
there until you’re fully vested).

2. Determine your investor profile
Investor, know thyself! Every investor is different and knowing yourself is the first step to
allocating your investments appropriately. Before you can determine your asset
allocation strategy, you must first be able to clearly define your goals. Remember,
401(k) money is retirement money and everybody has different dreams about what their
retirement will entail – traveling, boating, etc. Also, you may have some pre-retirement
goals for which you need to save some money. Each goal may represent a separate
pool of money and there are different investment options available to you to help fund
each goal. Second, determine the time horizon for retirement. Is it more than 10 years
away? In general, the longer you have until you need the money, the more heavily
weighted you should be in stocks. You’ll have more time to recover any losses incurred
during a market downturn. The third consideration concerns how psychologically
comfortable you are with those market downturns. Will you really be able to tolerate the
inevitable ups and downs that the stock market delivers?

3. Allocate appropriately
Asset allocation is the principle of deciding how to spread your investments across
various asset classes, such as stocks, bonds, and cash. There are subcategories within
each class, such as small, medium and large cap stocks. The idea is to diversify your
holdings in order to potentially increase returns while diminishing risk. A variety of
factors determines the appropriate allocation for each individual – When you need the
money (not automatically dictated by your retirement age), how much money you have
now and expect to need later, what kind of risks you’re willing to take, and what other
assets you have invested outside of your 401(k). Perhaps the most important factor is
your time horizon – the more time you have, the more aggressive you can be.

4. Limit exposure to company stock
Company stock can be a double-edged sword. On one hand, as a loyal employee who
understands the business, you want to participate in the growth of the company by
being a shareholder. On the other hand, it is risky to have too much of your portfolio in
one stock. Having too much money in a single stock issue creates a non-diversified
portfolio. Most investors are able to reduce volatility significantly by having a diversified
portfolio. Besides, do you really want the fortunes of one company to control your
salary, benefits, pension and your 401(k)?

5. Reallocate tactically
While it is not advisable to move your money around daily (market timing in general has
not proven to be an effective strategy over the long haul), it is advisable to look at what
your investments are doing from time to time. If one segment of the market has
outperformed other segments significantly, then your portfolio is likely to be significantly
out of balance. In other words, if you wanted to have 70% of your money in stocks, and
it has grown to represent 80% of your portfolio, you need to rebalance your portfolio.
You may also need to consider other strategic moves if your mutual fund suffers from
style drift, there’s a change in management, or if a similar fund with lower expenses
becomes available. Take a disciplined approach to monitoring your investment

6. Do not panic
Listening to the evening news, and hearing about the market changes on a daily basis,
can cause even the most stalwart of investors to get nervous occasionally. Stocks
fluctuate in value, it’s the nature of the beast. Just remember that you are investing in
your 401(k) for the long term. Although there are no guarantees that this will continue in
the future, the direction of the stock market over the long term has been up. There will
continue to be downward dips and swings, which is why knowing how you’ll react to
those swings is a factor to consider in your overall asset allocation. Selling when your
investments are down is the best way to lock in your losses. Try to remember that
patience is a virtue. Unless you believe that the investment cannot recover, it is usually
better to hold on for the ride. In fact, it might be a good opportunity to buy more!

7. Know your plan features
Every 401(k) plan has unique characteristics. To help maximize your plan, you need to
know all your options. Your plan documents, distributed by your benefits department,
will outline options such hardship withdrawals, loans, vesting schedule, limitations to
moving money, and in-service withdrawals. Read this document carefully or have a
financial professional review it with you.
Most plans allow for hardship withdrawals. There are several tax and penalty issues
associated with hardship withdrawals, so make sure you read your plan documents
carefully and seek professional guidance. If you use the option for hardship withdrawal,
you may be suspended from the plan for a specified period.
The vesting schedule refers to the years of employment before the company match
money becomes yours. Vesting schedules either are graded, meaning you get a
percentage of the money in successive years of employment; or cliff, meaning you get
all the money at once after no more than five years. Keep the vesting schedule in mind
if you are thinking about quitting your job.

If the plan does not meet your investment needs, and it allows for in-service
withdrawals, you can move some of the money into other vehicles, such as an
Individual Retirement Account (IRA). An IRA gives you many options for investing your
money, thereby enhancing your diversification abilities.

8. Borrow judiciously – if at all
Early 401(k) plans had no provision for loans. Providers added most loan provisions as
an incentive to encourage greater participation – participants would be more likely to
save for retirement if they could access the money before they retired. This does not
make loans an attractive feature! Many people believe (often erroneously) that if the
interest rate on the 401(k) loan is less than they would have to pay elsewhere, the
401(k) loan is a good deal. That may be, but it does not take into consideration the real
cost of the loan – the lost opportunity cost. The money in your plan cannot grow if it is
not there! If the investments in your plan are growing by 12%, that is what borrowing
from the plan costs you, plus growth on that growth. Another consideration needs to be
the tax consequences of borrowing from your plan. While you do not pay any taxes on
the money when you borrow it, you do pay the loan back with after-tax dollars. Then,
when you begin to take withdrawals at retirement, you pay taxes on those dollars again
– you are paying taxes twice. If you do some calculations, you may find that borrowing
from your plan is an extremely expensive option. Borrow only if you must.

9. Consider tax consequences of your actions
Most of the things we do in our financial lives have tax consequences. In the case of
the 401(k), you can avoid several negative tax consequences. If you leave your current
employer and want to take your 401(k) money with you, be sure to roll it over directly to
an IRA or to another employer’s plan. You may leave it in your former employer's plan
only if you have more than $5000 in your account. If you take a full distribution, you will
pay federal and state taxes on the entire amount. If you are not yet 59 ½, you also will
pay a 10% penalty. This could reduce your lump sum distribution to almost half its
original value. It will not help your retirement nest egg. Do not take a lump sum at
retirement, unless you need all the money at once. Take out only what you need, so the
bulk of the portfolio can continue to grow tax-deferred. If you are over 72, you must
follow the Required Minimum Distribution rules. Rolling your money from your 401(k) to
an IRA may make sense for a variety of reasons, and fortunately, an IRA rollover is not
a taxable event.

10. At retirement, balance your needs for income and growth
Most people should disregard the notion that when you retire you should move all your
money into bonds and stay clear of the stock market. Inflation, even when it is under
control, has a nasty way of ensuring that a dollar in the future will not buy what a dollar
does today. You must ensure that your investment holdings have the potential to
outpace inflation, so that the income you receive from your investments can have the
same purchasing power when you’re 85 as it does when you’re 65. This means you
should have a portion of your money in investments that have the potential to outpace
inflation, such as stocks, regardless of your age.

Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification.

The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.

A diversified portfolio does not assure a profit or protect against loss in a declining market.

This communication is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

The return and principal value of stocks fluctuate with changes in market conditions. Shares when sold may be worth more or less than their original cost.

All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful.

Investors should consider their financial ability to continue to purchase through periods of low price levels.

Distributions from traditional IRA's and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.

Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.  Please view the Investor Alerts section of the FINRA website for additional information.