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Getting Started in a 401(k) Plan—and Getting the Most Out of It

By Christina Kilroy

February 26, 2016

This week, ICI and the Investment Company Institute Education Foundation (ICIEF) joined thousands of corporations, nonprofits, and government agencies to celebrate America Saves Week. This annual campaign encourages Americans to assess their financial situations, set savings goals, and implement plans to achieve them.

Research from ICI suggests that most mutual fund owners are already on the right track in this regard. By and large, mutual fund–owning households are focused on achieving long-term goals, with 91 percent saying that saving for retirement is one of their financial goals, and nearly three-quarters indicating that retirement saving is their primary financial goal.

The need to meet that goal is bringing more investors to mutual funds. Employer-sponsored retirement plans are increasingly the gateway to mutual fund ownership: 67 percent of households that purchased their first mutual fund in 2010 or later purchased it through an employer-sponsored retirement plan.

Getting started in your employer’s retirement plan is a crucial step toward retirement readiness—but it’s also important to make sure that you’re taking full advantage of the benefits it offers. Sarah Holden, ICI senior director of retirement and investor research, offers three key ways that workers can be sure they’re making the most of their 401(k):

1. Max out the employer match. Most—three out of four—401(k) plans feature employer contributions to plan participants’ accounts. The formulas of these contributions vary by employer, but the most common approach is a simple match, where the employer matches a certain percentage of employee contributions up to a maximum percentage of employee salary. Review your contribution rate to make sure you are at least taking full advantage of any match your employer offers. Depending on your situation, you may want to go beyond just maxing out the employer match and save even more.

Although 401(k) plans are often designed to encourage plan enrollment and adequate savings rates, participants are free to determine their own contribution levels or to opt-out of enrollment altogether. But even if it may seem like a stretch to save, do yourself a favor and at least max out that employer match.

2. Decide on your investment approach. This step comes down to what kind of investor you are: are you a do-it-yourselfer, wanting to build your own portfolio from the options available in your plan? (On average, 401(k) plans offer 27 investment options.) If so, you will have to adjust your portfolio over time, to maintain an appropriate mix of assets. It’s also important to remember your long-term strategy despite potential day-to-day volatility of the markets. Generally, ICI research finds that plan participants do not overact to market movements; instead, they make modest levels of changes to their asset allocation. For example, in 2014 only 10.5 percent of participants in 401(k) and similar plans changed the asset allocation of their account balances, and 6.6 percent changed the asset allocation of their contributions.

If picking your own investments seems too daunting, you may want to consider investing in a target date fund. Each fund holds a diversified mix of stocks and bonds that is automatically rebalanced depending on an expected retirement year. Nearly three-quarters of 401(k) plans offer a suite of target date funds in their lineups, so it’s likely your employer does.

3. Preserve your nest egg when you change jobs or retire. First and foremost, avoid the temptation to cash out of your employer plan, even if your account balance is small. Research has shown that younger workers are more likely to withdraw small account balances, despite the fact that they have the most to lose—by missing out on the future returns of those assets. Plus, if you do cash out, you could be hit with tax penalties.

Second, consider your options: you can roll the money over to an IRA, move it to a new employer’s plan, or possibly even keep it in your old employer’s plan. Most households that own traditional IRAs with assets from a rollover researched their decision in a number of ways, including consulting professional financial advisers, financial services firms, and materials from their employer. Rollovers are especially appealing to those who want to consolidate their assets as they progress through their careers, rather than leave them behind in a former employer's plan.

Campaigns like America Saves Week are a great tool for spreading awareness of the importance of saving and investing. But we have to go beyond awareness—to action. If you’re one of the millions of Americans who are focused on saving for their future in an employer-sponsored retirement account, the three steps above will help you make the most of your retirement plan.

Christina Kilroy is vice president of the ICI Education Foundation, which partners with nonprofit organizations and government agencies to develop, deliver, and promote investor education programs.

TOPICS: 401(k)Investment EducationInvestor ResearchRetirement ResearchSavings

How America Supports Retirement: The Incentive to Save Is Not Upside Down

By Peter J. Brady

February 25, 2016

In my new book, How America Supports Retirement: Challenging the Conventional Wisdom on Who Benefits, and the first three ICI Viewpoints in this series, I’ve demonstrated that Social Security’s benefit formula drives participation in tax-deferred employer-sponsored retirement plans ; that the full system of government support for retirement is progressive; and that those in higher tax brackets don’t enjoy greater “bang for their buck” from tax deferral.

Read more…

TOPICS: 401(k)Government AffairsInvestor ResearchPolicy ResearchRetirement PolicyRetirement ResearchTaxes

Models vs. the Real World—Why Bond Funds Aren’t the Bond Market

By Chris Plantier and Sean Collins

February 25, 2016

In two recent blog posts, economists at the Federal Reserve Bank of New York use a theoretical model to assess the size of potential spillover effects from bond mutual fund outflows.

Read more…

TOPICS: Bond FundFinancial StabilityMutual Fund

How America Supports Retirement: What Do Tax Rates Have to Do with the Benefits of Tax Deferral? Less Than You Think

By Peter J. Brady

February 24, 2016

In my new book, How America Supports Retirement: Challenging the Conventional Wisdom on Who Benefits, I set out to gain a comprehensive view of how government policy supports American workers as they gather resources for retirement.

Read more…

TOPICS: 401(k)Government AffairsInvestor ResearchPolicy ResearchRetirement PolicyRetirement ResearchTaxes

MetLife Case Shows That “Assuming the Worst of the Worst of the Worst” Doesn’t Work

By Mike McNamee

February 24, 2016

If regulators are going to impose strict rules and heavy burdens on a business, should they have to demonstrate that those rules and burdens address an actual and probable risk?

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial StabilityFund RegulationGovernment AffairsMutual Fund

How America Supports Retirement: No, Benefits Are Not “Tilted” to the Higher Earners

By Peter J. Brady

February 23, 2016

Second in a series of ICI Viewpoints.

In my new book, How America Supports Retirement: Challenging the Conventional Wisdom on Who Benefits, I analyze the benefits individuals receive from the major government policies that help American workers accumulate resources for retirement: Social Security and tax deferral on compensation set aside for retirement in employer-based plans (both traditional pensions and defined contribution plans, such as 401(k) plans).

Read more…

TOPICS: 401(k)Government AffairsInvestor ResearchPolicy ResearchRetirement PolicyRetirement ResearchTaxes

New Research by New York Fed Confirms: Bond Funds Don’t Pose Systemic Risks

By Chris Plantier and Sean Collins

February 23, 2016

In a series of recent blog posts, economists at the Federal Reserve Bank of New York discussed results from a theoretical model assessing the potential for bond mutual funds to pose systemic risks.

Read more…

TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeInterest RateMutual Fund

Derivatives—Please Don’t Let Them Be Misunderstood

By Shelly Antoniewicz

February 22, 2016

Derivatives are important portfolio management tools that provide funds with many potential benefits, including the ability to:

  • hedge risk;
  • enhance liquidity, because derivatives can be more liquid than traditional physical securities;
  • gain or reduce exposure to unique markets or to asset classes when access through other instruments is difficult, costly, or impossible;
  • manage or equitize cash; and
  • reduce cost.

 

Read more…

TOPICS: Bond FundBondsEuropeFinancial StabilityFund RegulationInternationalMutual Fund

How America Supports Retirement: Tackling the Myths That Surround Us

By Peter J. Brady

February 22, 2016

America’s retirement system isn’t perfect but it’s a lot stronger than many people think. Whether by accident or design, the U.S. retirement system provides benefits to workers across the earnings distribution and has helped millions of retirees maintain their standard of living in retirement.

Read more…

TOPICS: 401(k)Government AffairsInvestor ResearchPolicy ResearchRetirement PolicyRetirement ResearchTaxes

Cybersecurity at Work: Creating Passwords That Are More Secure

By Peter Salmon

February 17, 2016

Welcome to the first in a monthly series of ICI Viewpoints focusing on sound practices in cybersecurity.

Read more…

TOPICS: CybersecurityInternationalOperations and Technology

U.S. and European Fund Investors Continue to Take Long View on EM Economies

By Chris Plantier

February 12, 2016

In an ICI Global Research Perspective last year, we showed that U.S. and European registered funds held $1.7 trillion in emerging market (EM) stocks and bonds at the end of 2014 (this total counts Hong Kong, Singapore, South Korea, and Taiwan as emerging markets). Of that, $1.27 trillion was estimated to be in equities and $431 billion was in bonds. We also showed that this $1.7 trillion was spread widely, across 80 different EM countries, and that fund net purchases of EM securities explained little of the variability of capital flow to EM countries.

Read more…

TOPICS: Bond FundEuropeFinancial MarketsICI GlobalInternationalMutual Fund

All Pain and No Gain for Fund Investors

By Paul Schott Stevens

February 5, 2016

The following is a letter submitted to the editor of the New York Times. A financial transaction tax (FTT) (editorial, The Need for a Tax on Financial Trading, Jan. 28) is a terrible idea that would harm all investors, especially American workers saving for retirement. We have yet to see an FTT proposal that would not hurt Main Street nor weaken our capital markets.

Read more…

TOPICS: Financial MarketsMutual FundOperations and TechnologyShareholderTaxesTrading

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