I’m assuming you read my post on the importance of education and its correlation to maximization of life time earnings. So now that you’ve got your BBA/MBA/JD/PhD/MD, now it’s time to choose an employer with an amazing retirement plan.
It’s awesome that all companies offer their employees pensions so they don’t have to worry about saving for retirement. KIDDING. Company pensions have been virtually eliminated as organizations shift the risk of money management from employer to employee.
While salary is uber important, so is your retirement plan. Your company could have a generous match only to be minimized by high fees, poor fund options, and a crappy vesting schedule. Key retirement plan attributes will accelerate your path to early retirement (or regular retirement if cubicles are your thing). Here’s a few on my list.
Automatic contribution![]()
The BEST type of retirement contribution is one that doesn’t require any effort. This is something the company bestows on you simply for working. Some companies have introduced auto-contribz as they eliminated their pension plan. Remember those? me neither. Anyway… One example, Amgen, offers a non-contingent 5% contribution on top of a 5% contribution match.
Generous match
Gravitate towards higher salary contribution matches between 5-10% and dollar for dollar matches. MasterCard offers a 125% match up to 6% of your salary while Visa matches 200% up to 3% of your salary. But concophilips matches the first $10,000 dollar for dollar. Nice. These criteria are easy wealth builders.
Immediate availability
If you’re adding value to your company why should you have to wait to make contributions and get the corresponding matches? Look for immediate availability even at the expense of a vesting period. Money earlier = faster wealth building.
immediate vesting![]()
Speaking of vesting periods, you never know when the next opportunity might present itself, so look for short or no vesting periods. Vested money means the ownership has transferred from the company to you. Vesting periods can be as long as 5 years. They can also have either stepped vesting (e.g., 20% vested after one year, 40% vested after 2 years, etc) or cliff vesting (e.g., 100% vested after 3 years).
Menu of options
Its good to have variety not only in your diet but also in your 401k plan. Look for a plan with a menu of options not only in asset classes and management style, but also in fund families. You want different asset classes to adequately diversify your portfolio or pick the right target date/risk fund. Some companies like to put you in their stock, which may or may not be risky (probably the latter). You’ll also want to consider passive funds as they’ll typically have lower fees with market performance on par with its benchmark. Lastly, if your company has provider like TIAA, they may position their (more costly) funds ahead of Vanguard funds (which are know for rock bottom fees).
Menu of funds with performance, expenses, and ratings
Low expense ratios
Look for mutual fund expense ratios less than 0.2%. Low expense ratios(the fees you pay for money manager) ensure you keep the most of YOUR money you set aside so it can grow. What I’ve seen with smaller to mid-size companies is inferior programs with high costs i.e., expense ratios north of 0.5%.
Tax Treatment
401k plan tax treatment started as tax deferred but within the past few years, Roth 401k have allowed savers to contribute post tax money into tax free accounts upon withdrawal. We have a mix of tax deferred and tax free dollars. Another option your 401k plan may have is an after tax option that allows you to put money in after taxes and grows tax deferred. To my understand, you may be able to convert this money to a Roth IRA after separation paying taxes only on the earnings.
Benchmarking plans
So how can you tell if your plan sucks or is awesome? Several ways:
- Company website: Check out the company’s website. Go to the benefits portion.
- Plan provider website: Check out the plan provider’s website. Do a google search for the employer name, the plan sponsor (e.g., Fidelity, TIAA) and the phrase “retirement plan”
- Brightscope.com: bight scope grades the programs against other programs and gives quantitative and qualitative scores.
- Glassdoor.com: Current and former employees provide insight not only into salaries but also company benefits.
What attributes do you value in your 401k plan?