When it comes to investing in your retirement plan (401K), a lot of people are unsure or are uneducated about what to do. We talked with Dave Kulchar, Executive Vice President at Oswald Financial and partner of ERC, to find out the basics of a retirement plan and what people should do when it comes to investing for their future as well as how companies can help ease employees into the retirement plan process.
What can companies do to educate their employees about retirement plans?
To make a plan thrive, education is a huge part of what it takes to be successful.
“By having fully licensed, independent educators go out and give unbiased opinions and assist people with how they can invest their money is a great start. A voluntary one on one meeting is also encouraged,” says Kulchar. “Education is extremely important for conformability and helping people along.”
What makes a Success Plan Audit special?
Oswald Financial is also one of only 80 in the country that is licensed to do a Success Plan Audit.
“The Success Plan Audit will go beyond education and find how to get people into the retirement plan. It’s a 24-question survey that asks the plan sponsor about their plan design. Then Oswald will grade those categories vs. what drives more successful results and offer suggestion to maximize participation, money management and plan success,” says Kulchar.
Oswald also gives recommendations for what they think companies can do to get people into the plan to save, save at a higher rate and to get people into a money managing concept so they can either do it themselves or have it put on auto pilot for them.
“The Success Plan Audit is all about getting people to retire with dignity,” says Kulchar.
What do employees do wrong when it comes to investing in their 401K?
When employees invest in their 401K, a lot of them invest improperly. Kulchar says there are 3 mistakes people make when it comes to investing.
“The most obvious is that they don’t participate in their 401K plan. Next, if there is a company match, people may not take advantage of that full match. And finally, they don’t have an amount in mind of how much to save, so they end up not saving enough for retirement,” says Kulchar.
Another problem is something called retirement plan leakage. This happens in 3 different forms.
- Changing jobs: On average, a person will change his or her job 6 times in their career. Most people that change jobs will cash in their 401K plan when they move to another company. That means they will have liquidated their savings over a course of 5 jobs. This can happen when employees are uninformed about their options. Employees can move their money into their new employer’s plan, leave it invested, or put it into another account.
- Too much activity with loans: Over 60% of plans offer loans to its participants. Even though it’s an easy way to access cash, it’s very easy to keep borrowing money. Eventually you will find yourself paying back loans for years or even your lifetime. The paying back of loans not only takes away from investment returns, it could lower or disrupt future savings
- Retirement withdrawals: This is not necessarily a bad one if a person has exhausted all other resources, but there are penalties involved. People may need to withdrawal on their retirement because of financial hardships. If you take money out, you do get penalized by 10% and 20% is withheld for taxes. That means your money has now turned into 70 cents for every dollar. You are also prohibited from saving in a plan for 6 months.
What are the responsibilities of a fiduciary?
Though the Department of Labor is set to release new official guidelines this year on what fiduciary responsibilities are and who is a fiduciary, Kulchar says to be safe, consider yourself a fiduciary if you are making any decisions involving the plan at all.
You should consider yourself a fiduciary if you are involved with:
- Selection of the investments
- Cost of the investments
- Number of investments
- How investments are selected and replaced
- Or anything involved in the process
“You should make sure all of your decisions are being made in the best interest of the plan participants. Then you should be in pretty good shape,” says Kulchar.
Another gray area of being a fiduciary is how much advice you can pass onto participants in the plan about how to allocate their money.
You need to have a professional that can come in and take on that service for you or implement advice programs into the design,” says Kulchar. “As a fiduciary of the plan, it’s something you need to stay away from.”
Being educated on retirement plans, whether you are the fiduciary or the employee, is critical to your future. Be sure to take advantage of services like these so you can make the most informed decision when choosing a plan.
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