Not everyone remembers this: Your company is not required to offer a 401(k) plan. On top of that, not every company offers an employer contribution or match to help supplement your retirement savings. If you are eligible for a 401(k) and get a match, those are two great reasons right there to be thankful. Let’s not dwell though on the well-documented benefits of 401(k) plans such as their generous contribution limits, competitive fees and the convenience of saving through payroll deduction. There are three more reasons to be thankful for 401(k)s you might not realize.
This isn’t investment diversification, but tax diversification. Most 401(k) plans give participants the choice to make payroll deductions that are pretax, Roth aftertax or a combination of both. While that is an important decision and valuable benefit today, it can be magnified in retirement. It’s hard to appreciate now the flexibility in retirement to withdraw money from an account that is taxfree versus one you have to pay income tax on. Another reason to be thankful, there are no income restrictions to make Roth 401(k) contributions. This is still a common misperception and in stark contrast to the Roth IRA rules.
The last financial crisis is 10 years in our rear view mirror and the current bull market is nearly as old. Retirement plan account balances have steadily been growing and are now at an all time high. Some 401(k) participants may be getting the impression that investing is “easy.” Be thankful for the individuals, or fiduciaries, who decide what investments you have in your plan. Despite rosy results, not all investments are appropriate for retirement plans. A workplace retirement plan must cater to the diverse investment needs and sophistication levels of all employees. You might not always agree with their choices, but your plan fiduciaries are charged with acting in your best interest. While it is hard to predict the future of the financial markets, having someone or a group of individuals at your company oversee the investments in your plan is invaluable.
A workplace retirement plan should primarily be used to replace your income in retirement. Depending on your age, retirement may be right around the corner, or several decades in the future. Unexpected financial events impact everyone. Depending on their size and severity, they can also impact your lifestyle in retirement whether you realize it or not today. Loans are a common feature in 401(k) plans and come with their own pros and cons as a way to digest a financial emergency. Today though, companies are exploring emergency savings options within their workplace retirement plans. The traditional aftertax savings account (not to be confused with Roth mentioned above) is making a comeback. For the companies who offer it, their employees may save for emergencies with the same convenience and consistency of payroll deduction they use to save for retirement. Be thankful that your retirement plan offers you a safety net for short term financial needs on your long journey to retirement.
Here is something to look forward to and be thankful for in the future. Today, you earn income. When you retire, you won’t have a consistent paycheck anymore. You will have some income through Social Security and savings you have set aside over the years. However, how do you take that pot of money and convert it to a consistent and predictable stream of income? There is as lot of discussion and innovation occurring around this very topic right now in the 401(k) industry. Coming soon, you can be thankful that your 401(k) will provide you the option to covert some or all of your retirement savings into a predictable stream of income.
If you have access to a 401(k) plan and get a match, that is reason enough to give thanks to your company. Tax diversification, investment guard rails and the safety net they provide are three more reasons. Take a minute and send an email to your boss, member of your human resources team or company owner. They take considerable time and expense to provide a benefit that helps you prepare for retirement. Believe me, a little thanks today goes a long way in the future as your company considers more ways to help you.