Ted Benna can give you a 401(k) tip or two. He invented the nation’s popular retirement vehicle after all. And here’s a warning for you: If you’re like most people, you’re not getting the max out of your 401(k), he says.
“I’ve seen some investment advice not really doing what it was intended to do,” Benna, 76, told Investor’s Business Daily.
Benna, 76, an attorney and retirement plan consultant in eastern Pennsylvania, saw 40 years ago how a section of the Internal Revenue Code could spark a revolution in retirement savings. A bank client of his wanted to retain employees — other than just paying bonuses.
Benna designed a plan based on IRS code section 401(k). It allowed employees to save pre-tax dollars for retirement. Employers could contribute, too.
Voila, the 401(k) was born.
The bank took a pass on Benna’s 401(k) plan — figuring the Internal Revenue Service would close the “loophole.” But Benna built one for his own consulting firm, Johnson & Co., making it the first 401(k) plan. The rest is history, as $5.2 trillion is held in 401(k) plans, making it among the most common ways for people to save for retirement, according to the Investment Company Institute.
But this story doesn’t have an entirely happy ending, yet. Benna doesn’t like what he’s seeing done to his brainchild. And he has 401(k) tips to help you do better.
Max Your 401(k) Tip No. 1: “Make Sure You’re In The Game”
About half of U.S. households hold assets in employer-sponsored plans, such as 401(s). Yet, many employees skip contributing to 401(k) plans, even when they have access to them, Benna says. Some figure they can’t afford to contribute. Others detest the investment options in the plan — which is a legitimate gripe.
Even so, Benna says the biggest benefit of 401(k)s isn’t the tax advantage. It’s the forced savings nature. Since employees don’t see the money they’re contributing in their paychecks, it “helps turn spenders into savers,” he says.
Even if you can only contribute 1% of your pay, start there.
Benna says that even he, the father of the 401(k), struggled with this. When he had a mortgage and four children to support, he wouldn’t have saved if the cash hit his paycheck. “The fact it happens first (401(k) contributions) is why most people are able to successfully save,” he says.
401(k)s have additional perks. They typically allow you to save more than you can in an individual IRA. You’re likely capped at $6,000 a year contributions in an IRA, but $19,000 is most people’s 401(k) contribution limit for 2019. Additionally, you can tap 401(k) funds earlier than retirement. You can borrow money from a 401(k). There’s also a way to withdraw money from a 401(k) without paying the 10% early withdrawal penalty.
Tip No. 2: Pay Attention To Fees
Here’s the dirty little secret with 401(k)s: Some charge ridiculous fees. “It’s not pretty,” Benna says. “My biggest disappointment (with 401(k) plans) is how the financial community is getting grossly overpaid” to manage these plans, he says.
401(k) fees are largely hidden, so you have to look for them, sometimes in complicated plan documents. There can be layers of fees. First, the underlying mutual funds you invest in carry fees. Next, there might also be fees levied by the plan administrator.
One local business hired Benna to look at its 401(k). He noted employees were paying 2.75% annually in fees. The employer paid additional fees. Enough employees complained and Benna moved the plan to another provider that charged just 0.15% annually.
Check your plan’s 401(k) documents. Plans with more than 100 participants must provide a form 5500. You’ll find the fees spelled out there.
If you’re paying more than 2% annual, it’s time to let someone know. Fees should be south of 1%, and preferably much lower (below 0.5%). “Paying north of 2% a year in fees makes investing prohibitively expensive and eats a big hole in participant retirement balances, regardless of the services that are offered at that fee level,” according to a report by 401(k) analysis firm, BrightScope.
“That information is supposed to be publicly disclosed,” Benna says. “You should know what you’re paying.”
Tip No. 3: Don’t Complain — Bring Data
What if you realize your 401(k) fees are excessive? You’re paying the fees, not your employer, so it’s more of a problem for you than them. Unhappy 401(k) members often tell Benna employers turn a deaf ear to their complaints.
Here’s what to do. Don’t just march into the HR department and say, “Our plan stinks,” he says. Bring supporting data. “Have some decent information in hand and be able to pinpoint why you think the menu, or specific funds they have” can be improved. BrightScope provides free tools that help you show how your 401(k) compares.
If your employer doesn’t want to change the menu of funds, see if they’ll add brokerage-like capabilities so you can choose your own investments, Benna says. Watch these, too, as many layer on excessive fees.
Tip No. 4: Don’t Overthink Things
For most people, simply choosing the appropriate target-date fund is the way to go, Benna says. Target-date funds are premixed collections of funds. They’re designed to be best suited based on a date you plan to retire. Just make sure you check two things.
First off, fees are important. Make sure the target date fund isn’t just a collection of the funds with the highest fees. Also, make sure the target date fund isn’t too aggressive. Benna says many target-date funds tend to be too heavily weighted in stocks for people in retirement or close to it. Many should hold more cash than they do. “They can’t afford the risk that they are taking,” Benna says.
Hold on, too. Don’t try to jump in and out of the market with your 401(k). “When you stick with it, you tend to get better results,” he says.
Maximize Your 401(k) Tip No. 5: Don’t Assume Small Companies Have No Options
Many owners of smaller companies think 401(k)s and other retirement plans are out of reach. That’s not the case.
He’s working with employee-owners of a local hardware store. Five of them are saving $5,000 a year in individual IRAs. While a 401(k) might be too costly to implement, the firm could put in place another retirement account type: based on a Simplified Employee Pension, or SEP, and save $5,000 a year in taxes.
By contributing to a retirement plan as an employer, rather than an employee to an individual plan, the contributions avoid FICA taxes and postpone state and local taxes upon withdrawal.
People usually think the 401(k) is the only choice. But there are other options, Benna says. “If you work for a small business, you’re an owner of one, or you’re an independent contractor, and you don’t think you have anything attractive available, well the answer is, you do,” he says. He’s built new models with no ongoing costs.
What About Benna?
Did Benna make a fortune on his own invention? “I did OK” providing consulting services. But since it’s the IRS code, he couldn’t patent it. “That was one of the things we tried, you know, to see if we could copyright or patent,” he says. “We found out that we couldn’t.”
But he’s happy with how things turned out anyway. 401(k)s aren’t perfect. There’s room to maximize them. But, “there’s no question, during this 40-year stretch, we’re a lot better off in terms of people (being) in position to retire than we would have been without it,” he says.
Follow Matt Krantz on Twitter @mattkrantz
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