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No. of Recommendations: 5
How should an individual evaluate a potential employer’s 401K Plan? Following are a number of factors which I used during my working career.

1. Does employer offer a 401K plan? In general, I would consider lack of a 401K plan to be a ‘deal-breaker’ for me to work for that employer. Lack of access to a 401K plan will have a tremendous financial impact on employee’s future – especially if you are an above average wage-earner. Remember that contribution limits for a 401K plan are 3X-4X higher than contribution limits for an IRA – that difference translates directly into the potential value of your investment portfolio at retirement age.

2. Does employer offer a Traditional 401K plan or a Roth 401K plan? My recent research shows that a typical Roth 401K has nearly 15% financial advantage (i.e., after-tax spendable income) to the retiree versus that available with a Traditional 401K plan (i.e., assuming same contributions in each plan). Until this effort I had not recognized the tremendous financial advantage to the retiree when employer contributions were made to his/her Roth 401K account. Suggest younger employees should have a bias toward those employers who offer a Roth 401K plan versus those who offer a Traditional 401K plan.

Note: I consider the Roth 401K (and Roth IRA) to be high-risk for younger employees. The Roth ‘advantage’ is based on assumption that retiree will not pay income tax on distributions from a Roth IRA/401K account. Question: Do you trust that a future US Congress (perhaps the next one) will allow millennials to distribute and spend perhaps $20T (yes trillion) and not impose additional taxes and/or ‘means testing’ for government benefits (e.g., social security, medicare)? Color me skeptical. In my view Roth legislation means that IRS gets its ‘fair share’ (i.e., taxes) this year while also leaving open the opportunity for Congress to impose more taxes and/or ‘means testing’ in the future. As a risk mitigation strategy, suggest each person should consider this risk as part of his/her retirement planning. My personal bias has been to invest every dollar I can while minimizing the amount of tax I must pay ‘this year’. I will continue trying to avoid (or defer) paying income taxes so long as possible while (hopefully) passing a significantly larger portfolio on to my children. Remember those ‘deferred income taxes’ will also experience long-term compounded growth when they are invested rather than sent to the IRS.

3. How MUCH does my employer contribute to my 401K plan? For most of my working career, my employer contributed 4.5% of total salary if I contributed 6%. My last employer (before retirement in 2013) contributed up to 15% of total salary (I received 13.8%)!! Remember that the IRS limits on combined employer and employee contributions was $54,000 in 2020!! Suggest that employee should have a bias toward an employer who contributes more to one’s 401K account – and even more so if higher contributions are made to one’s Roth 401K account.

4. WHEN does employer contribute to my 401K plan? Obviously, employee would receive maximum benefit if all contributions were made on 1Jan of each year so that employee could enjoy that year of growth in his/her 401K account. However, most employer’s make contributions in conjunction with each paycheck. Implication is employee must adjust withholding for his/her contributions such that last contribution is made near end of December – maximizing your contribution earlier in the year could mean loss of further employer contributions. Finally, if employer contributions are based on some form of ‘profit sharing’, it is likely that such contributions will be made after close of the company’s fiscal year.

5. Does employer impose a VESTING PERIOD on its contributions? My understanding is that IRS allows employer to impose a vesting period of up to 5 years. Depending upon how long you think you might be working for a potential employer, suggest you should consider employer’s vesting requirement.

6. What about FEES associated with employer’s 401K plan? Usually, the employer will cover fees associated with administering its 401K plan. Each of the funds included in a 401K plan impose fees, (e.g., ‘expense ratio’) which you need to consider before investing in one of them. In my experience Employees were usually charged $50 per year for access to a ‘stock window’. In other words, it cost me $50 annually for the option to invest in S&P Index Fund or individual stocks rather than being limited to funds offered within the employer’s 401K plan. In my case, that $50 was usually well-spent.

Final Note: I believe that the person who is the most concerned with my financial well-being is me – any ‘service provider’ is only interested in using me (or you) as a source of revenue (i.e., remember fees). I believe that at every opportunity an employee should perform a rollover of his/her 401K account balance to one (or two) Rollover IRA accounts which you have opened with a well-known brokerage(s). IMO the long-term employee is the one who is getting ‘hosed’ with respect to 401K rules because he/she is (usually) not allowed to perform a 401K-to-IRA rollover. Only an ex-employee/retiree or employee who reaches 59.5 years of age has the LEGAL right to perform such a rollover. Once I reached 59.5 years, I began performing a rollover about every 3 months – until I actually retired at age 67. Each rollover took less than 5 minutes. In this manner, all of my retirement portfolio was gradually transferred from 401K account to two (i.e., I split funds between two brokerages as a risk mitigation strategy) Rollover IRA accounts by time I retired. Incidentally, I would not consider leaving my 401K account with an ex-employer – nor would I ‘roll’ my IRA account into my new employer’s 401K plan.
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