Questions You Should Be Asking Your Financial Planner about Your 401(k)

By Robert Atwood, Owner of Physicians Financial Corporation

Financial planners provide a broad range of services that can help you evaluate your insurance needs, structure a savings plan, provide investment expertise, secure income goals, and many of the other financial goals you have.  However, what often gets overlooked is your 401(k) retirement plan.  Many people neglect discussing their 401(k) with their financial planner because they view it as a work benefit and will often have a “benefit specialist,” who is employed by the practice in some other full time roll such as HR, etc., who helps them with their 401(k) plan decisions.  However, it is important that your 401(k) integrates seamlessly with the other investment and insurance products that you have.  There are 4 key questions that you should always ask your Financial Planner about your 401(k) plan:

• How much should I be contribute to my 401(k)?
• What are the tax implications of my 401(k)?
• Am I invested correctly in my 401(k)?
• And, is my 401(k) going to provide enough income when I retire?

1. How much should I contribute to my 401(k)?

The answer to the question of how much you should be contributing is not a quantifiable number or percentage as many people assume.  The real answer to this question can only be found after you’ve asked the following questions:

• Does your employer have a match program, and if so, how much is it?

There aren’t many places you can invest your money and get an immediate 100% return, but one place that you can is in an employer match program.  If your employer matches up to 5%, you should contribute 5%, if your employer matches up to 10%, you should contribute 10%.

• What’s your annual salary, and how much of a tax deduction can you receive for participating?

This question should be evaluated by your Financial Planner.  However, unless your Financial Planner is also a Certified Public Accountant (CPA), you should always consult your tax professional in answering this question.

• What are the contribution limits?

This question seems like a no-brainer, but if your employer has a different type of retirement plan other than a 401(k), the contribution limits can vary for each type of plan.

Once you and your Financial Planner have determined your appropriate contribution amount, you may wish to consider additional investment options that can supplement your 401(k) savings plan.  Often times we find that these additional supplemental investments may work in a more tax efficient way during the distribution process.

2. What are the tax implications of my 401(k)?

This was discussed briefly in the previous section, but it’s worth bringing up again.  You must understand the tax ramifications of your 401(k) plan and recognize that you are deferring the taxes today but will be responsible for paying them in the future.  Tax Qualified plans, or pre-tax investments (qualified to be taxed in the future) such as a 401(k) will reach a point where you will either need the funds at retirement (eligible to take a distribution at 59 1/2), or you will be required to take a minimum distribution at age 70 ½.  The amount of income you receive from your 401(k) plan could have an impact on Social Security and Medicare benefits and, if not properly structured, could have a negative impact. 

3. Am I invested correctly in my 401(k)?

Your Financial Planner should be able to help you analyze your current investment strategy inside of your 401(k) based on your personal information and stated goals, and ensure that your plan is consistent with your overall objectives and investment strategies.  For example, some plan participants may work with a planner who has determined that, based on their risk tolerance, they would be best served by a more conservative investment strategy.  Yet, when the planner evaluates their current 401(k) portfolio mix, they see that the client is out of balance and invested in an overly aggressive position.  This can inadvertently happen because the 401(k) Plan Sponsor may not be fully invested in your individual total financial picture.  The goal of the Plan Sponsor is often to simply get you enrolled into the program.  Therefore, it is important that you take the time to evaluate your personal investment strategy within your 401(k) with your Financial Planner.

4. Is my 401(k) going to provide enough income when I retire?

This is a very important question that very few people take the time to consider.  Remember, you’re not putting money away simply because it’s a good thing to do, but because ultimately it will become a source of income for you during your retirement years.  Your Financial Planner should discuss with you the implications of your 401(k) plan both during the accumulation phase, as well as during the distribution phase and how it will help you live the lifestyle you want during your retirement years. 

Proper planning can help you realize your objectives at retirement including adequate income, the reduction of income taxes, and providing a legacy for your generations to follow.