With almost $5 trillion in assets, the 401(k) plan is the primary driving force toward a financially stable retirement for millions of Americans.
With that amount of cash on the table, U.S. workers need to stay vigilant on all 401(k) fronts, and should be especially alert and proactive when their company makes changes to their 401(k) plan.
In a perfect world, employers likely have a good reason for the switch, such as reducing fees or improving the plan’s offerings. But in the real world, the change may, for one reason or another, be better for the employer than for the plan participant.
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Consequently, a change in providers means you should do a little sleuthing to make sure there have been no glitches in your account and that your new funds are the ones you really want, among other key issues that need to be addressed.
If a 401(k) plan change happens to you, take these critical steps to ensure your plan remains well-oiled, and suitable for your unique retirement planning needs:
Conduct a thorough assessment. If your company changes 401(k) providers, the first step you should take revolves around learning what has changed, says David Hryck, a tax lawyer and partner at Reed Smith in New York. “Not only will your investment options change, but company matches could become different as well,” he says.
“In order to get the most out of the plan, you should contribute the maximum match from your employer,” Hryck says. “For example, if your employer is matching you 5 percent, you need to do all you can to contribute that amount. Make sure to check your new statements to be sure they reflect the full amount that should have been transferred from the old plan.”
Focus on fund allocation and risk. With a new provider on the scene, it’s highly advisable to focus on your 401(k) portfolio components and any mitigating risk factors. “This is a very good time to evaluate the risk level of your portfolio and consider what allocation of funds you want in the funds,” says Kenneth A. Carow, a finance professor at the Kelley School of Business at Indiana University.
It’s not necessary to invest in every fund, Carow says. Instead, it’s more important to consider the level of risk that you, as the investor, is willing to take for the return on different investments.
“Many 401(k) investors rarely consider the appropriate set of funds for the level of risk and return that they are investing in,” Carow says. “Your fund representative should be able to provide you with suggested portfolio and risk levels for your to evaluate. Also, take advantage of the workshops offered by your fund representative to learn more about the different funds and how to select from the funds in your portfolio. Generally, when a new fund is adopted there are many more opportunities available for 401(k) participants to learn about their investing options.”
Act fast if the company match goes away. If, in the unfortunate event your company pulls its 401(k) employee match off the table (companies do this to cut operating costs), turn your attention to other retirement savings vehicles. “If the company match goes away, then you should no longer treat your 401(k) as your priority retirement savings account,” says Joshua Wilson, a financial planner at WorthPointe Wealth Management in Plano, Texas. “Instead, max out an IRA or Roth IRA before contributing to a 401(k).”
If you aren’t sure about making such a guess, don’t guess. Wilson advises consulting a fee-only advisor who owes you a fiduciary duty. “He or she can take a look at the specific plan changes and help you understand what questions you should be asking based on those changes, and what your options you have,” he says.
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Make sure you fully vet the required plan change notices. When your employer makes a plan change, they are legally obligated to provide with a Sarbanes Oxley (SOX) notice, which outlines what will be changed and when, what transactions they may not be able to perform during the change process and whom to contact regarding the change, says Pamela Bobersky, president at AMI Benefit Plan Administrators in Youngstown, Ohio.
“The sponsor should also issue fund information, usually in the form of 404a-5 notice, which outlines the current funds in the plan as well as the new fund lineup,” she says. “The 404a-5 notice should list the fund expenses, historical rates of return, comparative indexes and trading restrictions on the funds.”
When you get these notices, Bobersky advises that investors learn if any of their funds will be moved to the new plan, and make changes as appropriate.
Know what to do during any blackout periods. If the plan sponsor is making a change to the plan’s record keeper, there will definitely be a blackout period and it will usually last longer than the changes to the fund lineup. “Depending upon the specifics, there may or may not be a change to the investment lineup,” Bobarsky says.
When a record keeper blackout is on the table, Bobersky says investors should print out their account balance prior to the change and compare it to their balance when the blackout is lifted. “There may have been some gains/losses between the time of the blackout and the asset liquidation so the balances will probably not be exact,” she says.
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Also, review the final quarterly report from the previous record keeper and compare it to the first quarterly report from the new record keeper. “The transferred amount should match (unless there was a fee or a dividend that was processed between the time of the liquidation and the upload to the new record keeper),” she adds. “If it does not match, inquire with the new record keeper as to the difference.”
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5 Things to Do If a Company Switches Its 401(k) Plan Provider originally appeared on usnews.com
