Max Out On Your 401 - k - retirement savings plans

Kiplinger's Personal Finance Magazine, May, 1999 by Mary Beth Franklin

You may not have a say in how much your company kicks in. But if you don't like your company's plan-whether because of limited investment choices, poor fund performance, high fees or restrictions on moving your money around-don't suffer in silence. Let plan officials know your gripes, and persuade your colleagues to voice their concerns. Of course, if you work for a small firm, don't expect a plan like those offered at Fortune 500 companies. Providing dozens of investment choices, daily account valuation and the ability to access your account via the Internet costs money.

Be persistent. Your boss may be persuaded that improving the company's 401(k) plan now may help it retain employees and protect the company against future lawsuits initiated by disgruntled workers, who claim that better choices would have given them bigger retirement savings. Chances are your boss will benefit from an improved plan, too.

Does it ever pay to walk away from a 401(k)? In most cases, no. It's hard to beat the advantages of a tax-deferred investment. For example, if you contribute $10,000 to a 401(k) plan and you're in the 28% tax bracket, your annual take-home pay drops by only $7,200-so you start out $2,800 ahead. If your employer matches your contributions-say, 50 cents on the dollar-your $7,200 investment is suddenly worth $15,000. If you can't afford to contribute the maximum amount to your retirement plan, at least aim to get 100% of the employer match.

Once you've claimed the full match, you may want to divert the next $2,000 of your retirement savings to a Roth IRA. You get no up-front tax savings as you do with a 401(k) contribution, but all earnings will be tax-free in retirement.

                        TOP OF THE CLASS          INDUSTRY AVERAGE
ENTRY DATE            Immediate                  After one year
CONTRIBUTIONS         Up to 25% of salary        Up to 15% of salary
COMPANY MATCH         100% of employee deferral  50%, on first 6% of
                                                  pay
LOANS                 Allowed, no minimum        Allowed, $1,000
                                                  minimum
INVESTMENT OPTIONS    Ten to 20 options          Eight options
ACCOUNT VALUATION     Daily                      Daily
REPORT FREQUENCY      On Demand                  Quarterly
INVESTMENT SERVICES   Personal consultation      Printed materials,
                                                  group meetings
TECHNOLOGY TOOLS      Internet transactions      Voice-response
                                                  telephone system
PLAN EXPENSES         Employer pays all          Employee pay some
VESTING(*)            Immediate                  Five-year graduated

ENTRY DATE                YOURS
CONTRIBUTIONS
COMPANY MATCH
LOANS
INVESTMENT OPTIONS
ACCOUNT VALUATION
REPORT FREQUENCY
INVESTMENT SERVICES
TECHNOLOGY TOOLS
PLAN EXPENSES
VESTING(*)

(*) Vesting is the rate at which your employer's matching dollars become nonforfeitable, so you can take the funds with you if you leave the company.