A study by the Government Accountability Office (GAO), paints a picture of the bleak performance by investments in 401(k)’s—defined contribution plans—owned by blacks.
Black working households’ median defined contribution plans declined by:
- $14,700 (in 2015 dollars), from $31,100 in 2007 to $16,400 in 2013.
- White working households’ median DC balance did not change significantly over the same period, with median defined contribution balances more than three times larger those of blacks.
“I’ve known people who had the money in the same fund for 20 years,” says Craig Wear, a Certified Financial Planner™ and founder of Q3 Advisors and Game Plan Advisors.
Wear, who recently launched My401kInvesting, a service that enables any adviser to position him or herself as the go-to person for protecting and growing the 401(k) part of a client’s net worth, adds that “that strategy doesn’t usually yield good returns,” and offers the following tips for 401 (k) participants:
- Take full advantage of company matches. Many companies will match employee contributions up to a certain percentage. That’s essentially free money. Yet many employees don’t maximize their contributions to make sure they get the full company match.
- Don’t let a 401(k) be your only retirement investment. “If you put all your savings in a 401(k), that doesn’t leave you many tax-planning options after retirement,” Wear says. You will be taxed when you begin to withdraw the money because taxes were deferred on income you contributed to the account. It might be wise to put some of your savings in an account that won’t be taxed when you retire.
- Take control of your accounts. Many people aren’t happy with their 401(k) plan’s investment options, service levels, or performance, but they don’t think they can do anything about it. While it’s true that normally, you can’t get your money unless you change employers or retire, there may be an alternative. Many employers have adopted rules that allow employees to withdraw a significant amount while they are still employed and contributing. That money can be rolled over to a self-directed IRA where there would be greater control and more investment options, Wear says.
Unlike things such as education costs, you can’t borrow money for retirement. Be sure you are getting good advice and take control of this important part of your financial life.