Is Your 401(k) Underworked?

Categories : Financial, News
August 25, 2021

Average American workers miss out on $1,336 annually of “free” money. According to Fidelity Investments, that is the amount that workers fail to receive in 401(k) employer matching funds every year. This is due to insufficient salary deferrals by working people, who are not contributing enough to reach the employer’s contribution matching limits. Failure to collect available free funds into your account means that your money is being underworked.

Leaving money on the table should be a last resort, financially speaking.

Many reasons, and several excuses, address this ongoing financial tragedy. Some people simply cannot make ends meet after increasing monthly deferrals, despite receiving current tax breaks. Others (we suspect an even larger group) are unaware that their retirement money is not working up to its potential.

Encouraging 401(k) participants to increase their contributions is largely a matter of education. Financial advisors illustrate that increased contributions result in much higher account balances at retirement. For example, increasing personal contributions, and receiving the extra $1,336 in matching funds per year, raises the expected retirement account value by at least $300,000 over 30 years.

Underworking your 401(k) through ultra-conservative investing is also common, and especially among young people. When getting started, young savers should try to be very aggressive, owning a high percentage of quality equities. A very low-cost S&P500 tracking fund is a good choice for younger investors. Diversification into other asset classes can be implemented with age and increasing account balances.

IRA investors don’t receive matching funds, but similar strategy applies. As recently as 2015, only 8% of eligible Americans contributed to an IRA. Of those, only about a third contribute the maximum every year. This is yet another example of underworking retirement funds. Just as with young 401(k) participants, young IRA owners should invest aggressively, adjusting the asset allocation over time to reflect age and account balance.

In economics, lost performance from underworking your retirement funds is called “opportunity cost.” Also in economics, we use the term “sunk cost,” which simply means that what’s in the past cannot be changed. Fully employing your 401(k) and IRA funds should begin immediately. Your future comfort depends on your actions today.

Van Wie Financial is fee-only. For a reason.