Looking at data on how others are using their 401(k) or other defined contribution plan, here are a few points we’d like to highlight.

Most employers offer some form of match to employee contributions.  For example, if you put 6% of your salary into your 401(k) plan, your employer might match it with a 3% contribution.  That’s an immediate 50% gain!  It usually takes years worth of investment returns to make that much.  Your employer considers that match as part of your compensation package, whether you use it or not.  So take advantage of it and give your retirement savings a boost.

The Roth option came into existence for DC plans in 2006, but it is still not widely used.  With a Roth plan, contributions are made after-tax; so it won’t reduce your current income tax bill like pre-tax deferrals do.  You still receive tax deferral each year on the income within the Roth account and, better yet, you won’t pay taxes on qualified withdrawals* of contributions and earnings.

It seems that inertia has kept many employers from adding the Roth option and many employees haven’t looked closely at it when it’s available.  For those with low current tax rates, though, it may make sense to pay the taxes now in order to reduce taxes later on.

Most financial advisors recommend keeping your percentage in employer stock low, since you already are exposed to the risks of the company through your employment.  While the overall trend has been in the right direction (towards less employer stock), some employees continue to invest heavily in their company stock.  While loyalty to your company is a good thing, putting your eggs (job income + retirement assets) in one basket is a very risky strategy.

While the media and Wall Street seem to encourage frequent trading of your investments, most DC plan participants are not doing so.  While it is a good idea not to trade often, it seems that many employees are going too far in the other direction towards complete inaction.  It is a good idea to periodically review your account, at least once per year, and make sure that your investment mix matches your goals.

Many employees cash out their accounts when leaving a job, especially when the account is small.  This may be a costly mistake, as the distribution will be included in your taxable income as well as face a 10% penalty if it is not a qualified withdrawal*.

See our 401(k) Fact Sheet to see how your retirement plan compares to others.

*Generally, qualified withdrawals from a 401(k) are those occurring after age 59.5.  Some exceptions apply.  See your tax professional for further information.