What You Need to Know about

Employer Retirement Plans

If you have a pension plan (or defined benefit plan), count yourself as a very lucky person.  Just a few decades ago, an estimated 62% of American workers had a pension plan at work.  Times have changed. Now only 17% of workers have a pension plan.

If you do have one, your company’s HR department can probably give you the information you need about future pension payments you may be entitled to receive.

Nowadays, it’s much more common to have a retirement plan, such as a 401(k), 403(b) or 457 plan.  On these plans, you (and possibly your employer as well) contribute a specified amount each year. This goes into an account that can usually be invested in mutual funds, ETFs or some type of insurance contract.

The accounts have big tax benefits to help grow your money faster. This is a huge benefit. So, if you have the ability to contribute to a retirement plan at work, you should!

Each year, the IRS allows you to contribute up to a certain limit. That amount is excluded from your taxable earnings, lowering your income tax for that year. Your employer also may “match” some of your contributions, essentially giving you free money. Earnings accumulate tax-free until you take the money out. Then taxes are due.

There is no better way to build wealth for retirement.

If your employer offers a ‘Roth’ version of the plan, you may contribute after-tax dollars instead. So you pay taxes up front, then all the money that builds up in the account will be tax free in retirement.

Remember that by investing, you take advantage of compounding. The tax-advantaged nature of these accounts supercharges that.

Most plans offer an ‘employer match.’  In these cases, your company will match your contributions up to a percentage of your salary. So if you put in the first 3%, for example, they’ll put in another 3% for you. Witness something we don’t see often: This is truly FREE MONEY.

Sadly a huge percentage of workers do not take advantage of this.  This adds up to about $24 billion per year in money lost!!! Be sure you are contributing enough to get this free money EVERY YEAR.

Because of tax benefits, you can only contribute a certain amount. For 2017, you can put in up to $18,000 in your plan. However, a “catchup” provision permits workers age 50 or older to contribute an additional $6,000 per year.

The money you contribute is yours from the start. However, your company’s match will likely be “vested” over a period of years, so if you leave after working there just a year or two, you may not be able to keep all of it.

Now, the bad news:  with pensions, the company agreed to pay you a certain amount per month when you retire. Today, you personally shoulder the investment risks for your own retirement plan. 

While your employer may contribute, they aren’t responsible for the end result. So that’s why it’s vital that you get educated and/or use professional help with your accounts. If you don’t do it right, you’re the one who is at risk.

Investing effectively is critical. If you’re going to do it yourself, make sure you get educated.  If your employer offers Managed Accounts or Target Date Funds, these can help you.  While there are no guarantees, having professional help makes sense.

Research shows those who get help usually end up with significantly more money in their accounts for retirement, simply because the average investor tends to buy and sell at the wrong time. 

What’s great about these plans is you can put everything on Auto-Pilot.

• You can have a percentage automatically deducted from every paycheck.
• Then you can also set this to auto-increase each year.
• You can increase it when you get a raise, since you won’t miss money you haven’t seen yet.