Working the Plan

Zach Blattner

WORKPLACE RETIREMENT accounts can be confusing and intimidating. Often, human resources departments serve as the contact point for employees, yet HR folks rarely know much about the nuances of a plan’s investment options—and, in any case, they aren’t legally allowed to offer advice.

Not sure how to handle your 401(k) or similar employer-sponsored plan? My first step was determining how much to contribute per pay period, so that I could hit the $18,000 annual limit. To do this, my wife (who works in a school and automatically contributes 11% to a pension) and I made sure that we could afford our other expenses, without counting on this money. I believe retirement should be the top priority for most people—more important than a new car or even the children’s college tuition.

Next, I ensured that I collected the full match that my employer offered. I learned that if I contributed too much early in the year and hit $18,000 in October, I’d lose out on the match in November and December. Check with your 401(k) plan to see how they determine matching payments and what you need to contribute each pay period to get the entire year’s full match.

My plan offers both a traditional 401(k) and a Roth 401(k). I decided to split my contributions between the two as a hedge against uncertain future taxes. The deduction from the traditional 401(k) reduces my current taxable income, which is great, while the Roth builds an account that I can tap into during retirement without paying taxes. If I leave my company, I’ll need to roll each one into a separate account to keep them distinct.

Once I made all of the technical decisions, I was ready to invest. When I initially joined my company and looked at the funds, I sorted the 25 available and noticed they all had fees of at least 1%, except for Vanguard Group’s S&P 500 index fund, which was far cheaper, since it’s passively managed. I put all of my contributions into this one fund and figured I would use my personal accounts to invest in other market sectors. But I also gave feedback during an HR survey, requesting more options.

I don’t know whether my feedback had any impact or whether it was an already scheduled plan change, but three months later I noticed that five more Vanguard index funds were introduced, all with lower expenses than the other available choices. I reallocated my future contributions to match my overall philosophy. I split the majority of my money between the S&P 500 and an international index fund, with another 5% to 10% each in Vanguard’s small-cap, mid-cap and emerging markets index funds.

Zach Blattner’s previous articles include Not So Fast and Growing Up (II). Zach lives in Cambridge, Massachusetts, and is a former teacher and school leader who now teaches English teachers as a faculty member at Relay GSE. He is a self-taught finance nerd who dispenses advice to his wife, friends, family and anyone else willing to listen. Follow Zach on Twitter @Mr_Blattnerz.

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