5 Little-Used Features of Your 401(k) Plan
When it comes to saving for retirement, your 401(k) is probably your go-to vehicle—especially if your company offers a match.
However, you might be pleasantly surprised to discover that your retirement plan might come with additional perks. Not all 401(k)s have all of the following five features, but it’s worth asking your human resources representative about the options to see if you can take your retirement plan to the next level.
1. Automatic Escalating
One of the best ways to make sure that you keep saving over time is to increase your 401(k) contributions when you receive a raise. It’s also important to boost your contributions as your finances improve. You might only be putting a small amount toward retirement right now, but once you pay off your credit card debt, you can invest more in your future.
Some retirement plans come with automatic escalating to help you automatically increase your contributions. In some cases, you can arrange matters so that your contribution increases as you make more money. Other plans might allow you to automatically increase your contribution by a set percentage each year. You could set it to escalate your contribution by 0.5 percent or 1 percent, depending on what you’re comfortable with. That way, you don’t have to remember to increase what you set aside, and you save more toward retirement every year.
2. Automatic Rebalancing
In some cases, if you want to make sure your retirement portfolio remains balanced, you need to log into your account and actually initiate transactions. However, some 401(k) plans offer automatic rebalancing. This allows you to pick your own asset allocation, and you can instruct the administrator to rebalance your portfolio if it strays too far from your preferences.
Keep in mind that automatic rebalancing does not shift assets as you get closer to retirement (like a target date fund does). Instead, rebalancing focuses on whether your current asset allocation is still what it should be, based on current market conditions. A good rule of thumb is to rebalance when your allocation strays 5 percent or more from your desired allocation. With this feature, you don’t have to remember to take care of it yourself.
3. Roth Option
Starting in 2006, employers have been able to amend their 401(k) plans to allow for a Roth option. Not all employers have done this, but if you are interested, you can ask your HR representative if your company’s retirement plan comes with a Roth 401(k) option.
With the Roth option, your contribution is made with after-tax dollars, so you don’t get the tax deduction that comes with a traditional 401(k) contribution. However, your money does grow tax-free. So, later, when you take distributions from your retirement account, you don’t have to pay taxes. Additionally, the Roth 401(k) doesn’t come with income limits like the Roth IRA does. Even high earners can contribute to a Roth 401(k) if they want.
4. Hardship Withdrawals
If you are experiencing financial difficulty, you might be able to qualify for a hardship withdrawal from your 401(k).
Any company that offers this option should have a set of criteria that qualifies you for a hardship withdrawal.
When you take a hardship withdrawal, the money is not repaid to the retirement account. It’s not a loan. As a result, you might still be subject to the penalty the IRS levies against those who take early distributions from a 401(k). There are some exceptions to the early withdrawal penalty for those younger than age 59 ½. Those exceptions include:
- Total disability
- A court order requires you to give the money you withdraw to a dependent or divorced spouse
- Your medical debt exceeds 7.5 percent of your adjusted gross income
There are other exceptions to the rule, so you should check with your plan administrator to find out whether or not you qualify for a penalty-free hardship withdrawal.
5. Financial Advice
Even if you don't get access to planners directly, there's a good chance you can go to your 401(k) plan home and get some helpful information and guidance on investing.
As more companies become interested in employee wellness, they are adding benefits to their company retirement plans. This means that you might have access to a financial planner to help you figure out how to allocate your portfolio. A 2015 survey by Aon Hewitt says that 69 percent of employers offer online investment guidance, and 53 percent offer phone access to financial advisers.
Some employers might also ask financial professionals to come and give seminars on retirement planning to help you better understand your choices. And in some cases, you get unlimited free access to financial professionals. Other plans, though, might allow you one free session a year, or have some other limit on the advice you receive.
One of the best things you can do is review the benefits offered by your employer. You might be surprised to discover that you are missing out on valuable perks.