How Your Employer May Be Ruining Your 401K Savings

 In Personal Finance, Retirement

401k savings

If you asked most people how they are saving for retirement, the vast majority of them would mention that they had a 401k through their employer.

This has become a trusted standby, and it doesn’t look as though that will change anytime soon.

However, it’s important that you know about how your own employer could be damaging your 401k savings.

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They’re Not Matching

To be fair, this is your own fault if your company matches your 401k contribution.

Even if your entire company plan is full to the brim with high-fee, subpar mutual funds (more on that in a moment), there’s still no reason not to beef up your 401k savings by taking advantage of employee match.

Otherwise, you are literally leaving money on the table.

If nothing else, you can always set up a separate IRA that will give you far more freedom for choosing investments.

You Left It with an Old Employer

Changing jobs can be a lot of fun and comes with the promise of a new adventure. However, you may also find that it means your precious 401k is being handled by an old employer and, potentially, not doing very well.

This is why you absolutely must do a 401k rollover when you switch employers. By doing so, you take the money from that company and stick it in an IRA where the funds will be tax deferred.

You want to take your time with this process to avoid any 401k rollover mistakes, but also make sure that it’s a priority, so it gets done sooner rather than later.

They’re Investing Your 401k Savings in Mutual Funds

Your 401k savings may be at risk despite the fact that they are being held in one of the most trusted investment vehicles on the planet: the mutual fund.

While there is no end to the investors who will praise the benefits of mutual funds, here’s the truth: they could be eating away at your 401k savings.

There are actually a lot of reasons to stay away from mutual funds. Here are just a few:

  • It’s nearly impossible to manage a fund by trying to forecast decades out into the future
  • Many fund managers focus far too much on marketing rather than investing
  • Most funds don’t perform nearly as well as investors are led to believe

If nothing else, the majority of people’s 401k savings will get absolutely destroyed trying to survive the gratuitous fees most mutual funds have become notorious for charging. You are much better off with another option.

Consider the IRA we mentioned earlier which would give you a lot more freedom to choose.

retirement accounts 401K IRA

The “In-House Fiduciary” Is Just HR

A fiduciary is supposed to have an almost sacred job where investing is concerned. To earn this position, they must pass their Series 66, become a CFP, build financial plans, etc.

The point is that a fiduciary has legal and ethical duties to the investors they look out for.

These aren’t present a lot of times at companies meaning people make decisions about their 401k savings with no real help from an actual professional with any real experience.

Usually, it’s someone in HR; a role for which they weren’t especially trained.

Often, they’re even the ones setting up the 401ks to begin with and/or meant to monitor their performance. This is only ever going to end one way, and it’s never going to be good.

They’re Using the Same One from Decades Ago

You’d be surprised how often companies just keep whatever 401k they’ve had for years because no one wants to go to the trouble of choosing a new one. It’s absolutely crazy when you think about it.

People are foregoing the possibility of making a lot more money for their retirement just so they don’t have to spend some time finding a new option for their employees’ investments.

This is why you should always ask about the 401k. See when the company chose it and, if it was a while ago, ask them why they’ve decided to keep it all this time.

We’re not suggesting you start any trouble, but it’s not a bad idea to tell your fellow employees too so they can also make informed decisions and ask right questions.

Lack of Education

At most companies, you sign up for your 401k sometimes at the beginning of when you’re hired, maybe after orientation, and then that’s about all you ever hear about it. Unless you go out of your way to find out about the status of your 401k savings, you’d never know.

Unless you go out of your way to find out about the status of your 401k savings, you’d never know.

Now, just like with the first reason we gave, this is your responsibility. Your 401k savings are a big deal, and you need to treat them as such, so it’s no one else’s fault if you don’t know how much you have saved away.

That being said, most companies do a terrible job of educating and informing their employees. They should explain how these accounts work up front and then keep each investor informed about their 401k savings as time goes by so people can make educated decisions.

What You Can Do

Obviously, we don’t want to leave you with all of the above information thinking that you don’t have any recourse. You can definitely take some steps to regain control over your 401k savings, even if your employer is making some pretty bad decisions.

As we mentioned at the beginning, it’s imperative that you get the full potential of your employer’s match with your 401k. This is free money, after all. However, if you know that your employer’s offering is subpar, then it’s important you understand to properly fund an IRA.

Namely, take whatever money you have left over for this purpose and put it in a traditional or Roth IRA.

Always feel free to ask questions. That is your right as an employer and investor. You should also begin doing your own research, though. You can speak to the HR department – or whoever handles your 401k – or call and talk to the providers directly.

Again, these are well within your rights.

Ask the provider where their revenues come from. If someone within your company is supposed to be acting as a fiduciary, ask them. If they don’t know, make sure you tell them that this is not only their responsibility but something they could get sued over; ignorance is not an excuse.

Don’t become a victim of your employer’s poor handling of your 401k.

See if any of the above sounds familiar and, if so, make sure you take action to protect the savings you have worked so hard for.

early retirement

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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