I just started a new job eight months ago and I am now eligible to enroll in the company 401(k) plan. What percentage should I contribute to the plan and what investment companies should I use?
By seeking answers to your questions, it shows that you're serious about taking control of your financial future and I applaud you for that, said FPA member Jeff Cobb, CFP®, of Logical Investments. "The decision regarding what percentage you should contribute and how you should invest your contributions is a very personal one. What is the right decision for one person can vary greatly from what is right for another person. Many factors come into play in order to determine the right choices specifically for you. A few of the factors would include age, investment time horizon, income, net worth, risk tolerance, tax
bracket, and amount of employer match."
In the absence of or prior to engaging a financial planner, consider using Web site tools and calculators to determine how much you should set aside. Choose to Save's BallPark E$timator is one such calculator.
By way of background, it's worth noting the following facts about 401(k) plans:
- Pre-tax participant deferrals average 5.6 percent of pay for non-highly compensated workers and 7 percent of pay ($3,250 per year, or $4,500 including the typical employer match) for highly compensated workers, according to a recent Profit Sharing/401(k) Council of America's (PSCA) release.
- 401(k) plan participants tracked in the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI) database had on average an account balance of $65,454 at year-end, 2007. According to an ICI/EBRI press release, 401(k) account balances did vary with participant age, tenure, and salary. "Individuals with account balances of less than $10,000 were primarily young workers or workers with short job tenures," the release said. "In contrast, those with account balances in excess of $100,000 were primarily older workers or workers with longer job tenure."
- The typical 401(k) plan has had approximately 65 percent of assets invested in equities, according to the PSCA. "Assets are most frequently invested in actively managed domestic equity funds (29.1 percent of assets), indexed domestic equity funds (10.0 percent), stable value funds (8.6 percent), and balanced stock/bond funds (8.0 percent)."
- More than half (55.1 percent) of all 401(k) plans and 70.5 percent of plans with 1,000 or more employees now permit immediate participation in their 401(k) and just 14.7 percent of all plans surveyed have a one-year or longer service requirement prior to eligibility, according to the PSCA. In addition, in 2008, only 29.3 percent of companies required one year of service or longer for matching-contribution eligibility, and a large percent of plans have no minimum age requirement for participant deferrals (42.8 percent) or for non-matching company contributions. In addition, company contributions average 4.4 percent of payroll. They are highest in profit sharing plans (8.6 percent of pay) and lowest in 401(k) plans (3.2 percent of pay). Immediate vesting is present for matching contributions in 43.6 percent of plans and for non-matching contributions in 20.0 percent of plans. Among plans that do not have immediate vesting, graduated vesting tends to be the most common arrangement for all plan types.
Have a Question?
You may submit a general financial planning question by filling out the form below. Please be aware your question may be considered for inclusion on FPA's Web site feature, Question of the Week. To protect the privacy of individuals, questions will remain anonymous.