Five Tips On Making the Most of Your 401(K)

By Clare Bergquist, Director, Schwab Corporate & Retirement Services.

Many of the provisions of the 2006 Pension Protection Act focus on how companies can act to help their employees save more for retirement, including the ability to automatically enroll employees into a 401(k) plan unless they actively choose not to participate. However, the law also features a number of important changes that affect how employees can take more control of their financial futures through their companies’ plans.

Here are five tips for how participants in employer-sponsored plans can make the most of their 401(k):

     *Get more advice. The Pension Protection Act expands the ways in which employees can receive specific advice on their 401(k) plans, including how and where to invest. Employees should check with their benefits departments to learn more about their advice options or to request the addition of advice services.

     *Save more and catch up. Thanks to the new law, several 401(k) features that were set to expire at the end of 2010 have become permanent, including the $15,000 annual contribution limit — which will continue to increase each year — and the additional $5,000 “catch-up” contribution for those over age 50.  Employees who haven’t increased their contribution amounts lately should act now.

     *Ask about the Roth. In addition to the contribution limits, the Roth 401(k) also was set to expire at the end of 2010.  In a Roth 401(k), payroll deductions are made on an after-tax basis, which means employees pay taxes on their contributions before they go into their plans. When employees finally do withdraw money, all their contributions and investment earnings are tax-free, provided specific withdrawal qualifications are met ― so the Roth 401(k) is a good choice for those who think they will be in a higher tax bracket when they retire.  Now that the Roth 401(k) has been made permanent, employees should ask their HR departments to consider offering both a traditional and a Roth 401(k) option.

     *Don’t stock up on stock.  The new law gives employees more freedom to decide whether or not to hold publicly traded company stock in their 401(k) plan.  Many plans must now offer employees at least three investment options besides employer stock and employees can, at any time, choose to sell company stock purchased with their own elective contributions.  After three years of employment, they can trade company      stock received through employer contributions. Employees who hold company stock bought with contributions made prior to Jan. 1, 2007 will be allowed to divest those shares over three years.  This new provision should cause consumers to examine their current portfolios to make sure they’re not overly invested in company stock, or a specific industry or asset class. Target or lifestyle funds can be an excellent option for those who don’t have time to actively manage a portfolio but want to make a single choice that invests in a diversified portfolio.

     *Rollover inherited assets. Under the new law, beginning in this year individuals who inherit 401(k) assets from parents, domestic partners or others can roll over those assets to IRAs without paying taxes. Previously, this benefit was available only to individuals who inherited 401(k) assets from their spouse.  Employees should take advantage of this change, and take a moment to double-check their own beneficiaries.

To read more retirement focused articles, please go to: http://www.schwab.com/marketinsight

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