Category: 401(k) Plans

Lug Nuts

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John Wooden is the greatest college basketball coach of all time, winning ten NCAA championships as the head coach of the UCLA Bruins. The Wizard of Westwood paid attention to small details, especially socks and shoes.

Each season, Coach Wooden instructed his players on how to correctly put on their socks and tie their shoes because if a player had trouble with their feet, they would not play well. He wanted to eliminate blisters and untied shoes that slowed down his players.

In the book Wooden – A Lifetime of Observations and Reflections On and Off The Court by John Wooden and Steve Jamison, he talks about how all the parts are needed for a car to run correctly, but if it had loose lug nuts, the wheels would fall off. Lug nuts are cheap and cost about $45 for a box of 24, and I doubt anybody ever considers them when buying a new car, but they’re a vital component for a functioning automobile. Coach Wooden had star players like Bill Walton and Kareem Abdul-Jabbar, but if the other players on the court did not play well and support each other, the team would lose. Bench players, substitutes, and lug nuts help complete the process and make things work.

Successful investors must pay attention to small details, like fees and expenses. Review your advisor fees and expense ratios on your funds. Try to cut the number of funds you own as well. Your funds have significant overlap if you own a few dozen or more, and you don’t need four or five large-cap mutual funds. A quick search on Yahoo! Finance can help you research your fund’s allocation, holdings, and fees. The ADV highlights your advisor’s costs.

Also, check your spending and budget. Can you eliminate recurring payments or reduce nuisance fees?

Your 401(k) is another detailed battleground. If you own a retirement target date fund, you don’t need to own anything else. A key component in your plan is the employer match, and it’s paramount that you match the match. For example, if your employer offers a 5% match, contribute 5% of your pay to the plan. If your plan offers automatic rebalancing, select the annual option. An annual rebalance keeps your risk tolerance in check.

If you pay attention to the small details, they will add up to big wins.

Failing to prepare is preparing to fail. ~ John Wooden

May 4, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

What Is A 401(k)?

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Corporate retirement plans are valuable tools for employees. In addition to personal savings and Social Security, a corporate retirement plan can help you retire in style, but what the heck is a 401(k) plan?

A 401(k) plan is a savings plan offered by your employer, allowing you to contribute a percentage of your pay to your retirement account. Your employer may also match your contribution, but more on that later. Let’s review some critical components of a 401(k) plan.

Contributions

The IRS allows you to contribute $22,500 of your pay to your plan; if you’re fifty or over, you can deposit another $7,500 for a total of $30,000. How much should you contribute? My recommendation is to contribute the maximum amount allowed by the IRS. If you can’t contribute the full amount, then aim for 10%. If 10% is too much, then match your employer’s match. If that is too high, contribute what you can because something is always better than nothing.

Profit Sharing

The 401(k) plan can include a profit-sharing match. However, from all sources, the maximum contribution to your plan is $66,000 or $73,500 with the catchup provision. Let’s say you’re fifty-five, earn $200,000 annually, and contribute 20% of your pay, and your employer matches 5% and offers a 10% profit-sharing match. Your regular contribution is $22,500, the catchup provision is $7,500, the match is $10,000, and the profit-sharing contribution is $20,000 for a total of $60,000.

Vesting

You are always 100% vested with your contribution because it’s your money, but your employer may restrict the employer match or profit-sharing contribution. For example, a six-year vesting schedule means that 20% of your employer contribution becomes yours every year. Then after six years, the entire balance belongs to you, regardless if you remain employed or move to a new company.

Traditional or Roth

Most 401(k) plans allow for traditional or Roth contributions. If you choose the traditional route, your contributions are pre-tax, and a Roth contribution allows for after tax-contributions, regardless of your income. If you’re a high-income earner, consider a Roth 401(k), so your funds will grow tax-free.

SPD

Each 401(k) plan comes equipped with a summary plan description (SPD), a resource guide for your plan. The SPD highlights the plan’s name, benefits description, vesting schedules, fees, investment funds, etc. Your HR manager or plan administrator should deliver it when you enroll.

Investments

Your plan fund lineup can include mutual, exchange-traded, and target-date funds. The lineup allows you to select funds and build your portfolio based on your risk tolerance. If you don’t want to make your own portfolio, you can choose a target-date fund based on your retirement year. For example, if you’re retiring in 2055, select the 2055 fund. The 2055 fund will get more conservative as you get closer to your retirement date. The investment process is automatic if you choose funds from the pre-selected list, meaning you do not need to invest the money every pay period.

Brokerage Window

A brokerage window allows you to select investments beyond the pre-selected fund lineup provided by your employer. You can buy individual stocks, bonds, mutual funds, and ETFs if your plan has a window. You may also trade options but tread lightly. If you select this option, you must make the investments each pay period; it’s not automatic. Several years ago, a client called because his 401(k) was invested in the money market account, and he was upset because the market was marching higher. I informed him he selected the brokerage account and had to invest the money himself, which he did not want to do, so we moved his funds back to the traditional side of his plan.

Loans

Most 401(k) plans permit loans, allowing you to borrow 50% of your vested balance to a maximum of $50,000. You can use the funds to purchase a home, pay for college, or cover medical expenses. Leaving your employer before you repay the loan is a distribution, subject to taxes and penalties. If you’re under age 59.5, the tax penalty is 10%.

Retirement

When you retire, you can leave your assets in the plan or roll them over to an IRA. If you keep your funds in the corporate account, you still must take your required minimum distribution at age 73, similar to an IRA.

Start

A 401(k) plan is an excellent way to create generational wealth, especially if your employer offers a generous match. Congratulations if you’re contributing the maximum to your plan, but if not, start today because the sooner you start, the sooner you can finish!

If you’re just starting out in the workforce, the very best thing you can do for yourself is to get started in your workplace retirement plan. Contribute enough to grab any matching dollars your employer is offering (aka the last free money on earth). ~ Jean Chatzky, Financial Journalist and Media Personality

January 31, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Do You Need A New Company Retirement Plan?

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According to one study, nearly half the American population worry they won’t have enough money to retire.[1] People dream of their golden years strolling the beach, hiking a mountain trail, or visiting loved ones. Few people want to work forever.

New year, new plan? Is it time to upgrade your company’s 401(k) plan? As an owner, you wear many hats, including fiduciary. As a fiduciary, you need a written summary plan description, record-keeping system, and documents to provide your employees.[2] You must also act in your employees’ best interests, follow your plan documents, diversify the plan assets, and pay reasonable expenses.[3] You can help your employees retire in style by offering a competitive 401(k).

Moving a 401(k) plan from one provider to the next requires effort, so you don’t want to do it often. Let’s review a few reasons why it makes sense to improve your plan.

  1. High Fees. Fees are like termites, and if you don’t eradicate them, they will eventually eat your home. It’s imperative to review your service provider fees, fund expenses, and administrative costs. A benchmarking study can help you determine if they are in line with the industry or not.
  2. Poor Performance. Do you have a subpar fund lineup? If your plan includes expensive mutual funds, variable annuities, or stable value funds, a new low-cost investment lineup could pay dividends and benefit your employees.
  3. No Service. If your service provider is slow to return your phone calls or emails, a change is warranted. Life is too short, so don’t waste your time on others who treat you poorly.
  4. Lack of Education. Does your current advisor provide educational workshops? Do they help your employees with financial or retirement planning? Will they meet with your employees in person or Zoom? If your broker, advisor, or agent is not helping your employees grow their wealth, it’s time to work with someone who will.
  5. Lack of Technology. Was your plan established years ago? Does it include auto-enrollment, financial wellness programs, or web access? Do you have a cool app? A dated plan may lack benefits common to newer ones.

Here are a few resources to assist you in your journey to find the best plan for you and your employees.

  1. US Department of Labor: https://www.dol.gov/agencies/ebsa/key-topics/retirement/401k-plans
  2. Understanding Fees: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/understanding-retirement-plan-fees-and-expenses.pdf
  3. 401(k) Plans: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/401k-plans-for-small-businesses.pdf
  4. Fee Disclosure Form: https://www.dol.gov/sites/dolgov/files/EBSA/employers-and-advisers/plan-administration-and-compliance/fiduciary-responsibilities/401k-plan-fee-disclosure-tool.pdf
  5. Selecting a Service Provider: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-sheets/tips-for-selecting-and-monitoring-service-providers.pdf

For most people, a 401(k) plan will be their most significant asset, possibly larger than their home, so offering one that helps them create wealth is prudent.  

For many people, being asked to solve their own retirement savings problems is like being asked to build their own cars. ~ Richard Thaler

January 20, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

[1] https://www.forbes.com/advisor/retirement/top-retirement-worries/

[2] https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf

[3] Ibid