401(k) Success, Diversified Wealth
By: Andrew Rosen, CFP®, CEP®

Regardless of your stage of your career (a seasoned professional, an executive, etc.), you are likely dealing with some sort of company sponsored employer retirement plan such as a 401(k).  As there are a lot of moving parts, these plans may seem intimidating.  Maybe some of you are avoiding them all together due to the anxiety.

I consider these retirement plans as the single best way to position yourself for retirement success.  Therefore, I can’t sit around and wait while good people go unserved.  Let me demystify the world of a 401(k). And, hopefully that fear or anxiety can be removed from the equation.

The basics.

At a very high level, most 401(k) plans work the same.  You elect to pull money directly from your paycheck each month into a plan.  These dollars are then invested into various vehicles of your choosing.  Typically, these plans have some sort of tax benefit to help entice retirement savers.  Once you retire, you then draw on these funds to help subsidize your income.

In 2018, the maximum contribution allowed is $18,500 (if under age 50). There is a $6,000 catch-up if you are age 50 or older.  Ok on to the moving parts.

The 12 items you need to know!


  1. Deferral Percent – One of the first decisions is what percentage to defer from your salary. You’ll typically elect a percentage (say 10%).  From each pay period, your employer will withhold that 10% of your salary and contribute it into your preselected investment options.
  2. Automatic Increase – A lot of 401(k) plans offer this feature. Annually, your employers automatically increase your deferral a percentage or two.  They’ll continue doing this until you reach the 401(k) limit.  This can slowly help you build a better position for your retirement.
  3. Matching Percent – Who doesn’t like free money? The majority of 401(k) plans have some sort of matching feature.  This means your employer will match your contributions up to some predetermined limit.  For instance, some plans match the first 6% you contribute on an annual basis.  Thus, if you made $100,000 and chose to contribute 10% of your salary this year, you would contribute $10,000 to your plan while your employer will contribute $6,000 on your behalf.
  4. Investment Options – One of the most intimidating features is electing your investment options. Typically, each plan has a predetermined selection of mutual funds from which to choose and those range in risk and return potential. Information is provided on each fund and then you can elect what’s appropriate based on your risk level.  Naturally, this is an area where Diversified often assists clients.  Although I am not a huge fan, there is an option to use target date funds. That is an option to “set it and forget it,” if you choose.   Make sure when electing your allocation you change both how you want your new dollars to be invested and your existing dollars.  These two investment allocations are typically different screens.  I’ve found many individuals remember to adjust one but not the other.
  5. Open Architecture – While there is normally a list of preselected mutual funds, sometimes there are other choices like open architecture or a self-directed option. These features allow one to pay a few dollars more to move their 401(k) to a platform with thousands of options.  This is a great feature if you are working with a professional in managing these funds and/or are comfortable doing so yourself.
  6. Automatic Rebalancing – Once you’ve selected your desired investment options and percentage allocations, you’ll begin investing into those desired mutual funds. Over time, the ebbs and flows of the markets will drive those investments away from your original desired allocation. This is where automatic rebalancing comes into play.  This feature reverts your account back to your original allocation.  This keeps your 401(k) in line with your plan and risk tolerance.  I suggest electing this option (as a quarterly rebalance) when available.
  7. Roth or Traditional – Another decision is whether you want your contributions to go in a Traditional pre-tax 401(k) or a Roth after-tax 401(k) (assuming your employer offers both). They’ll be invested in the same plan, but with different coding.  The decision comes down to this:  would you rather lower your current tax rate and be taxed later (Traditional)?   Or, would you rather be taxed now at your current income bracket and not be taxed upon withdrawal (Roth)?  It’s a personal decision for most and one that takes lots of planning.  It’s worth noting that the employer matching portion almost always gets contributed pre-tax, regardless of your elections.    
  8. After Tax – Many plans offer the ability to contribute after-tax dollars to your plan. These dollars are above and beyond the normal Traditional or Roth contributions and may provide some lesser tax benefits.  The biggest win in doing this is the ability to take advantage of the mega-backdoor Roth strategy.
  9. Vesting – In almost every plan, your contributions will vest immediately. However, the employer match contributions sometimes have a period until they fully vest.  This means if you left the company after that vesting period, you’ll get to keep their matching contributions.  Vesting periods can be a percentage each year for a few years or what is called “cliff vesting.”  In cliff vesting everything becomes vested once you hit your predetermined years of service.
  10. Loan Provision – I think this option does more harm than good, but it’s worth discussing regardless. Most 401(k) plans allow you to take some portion of your balance as a loan.  The funds will come out of your account tax free; however, you’ll be paying them back with after-tax dollars.  This means you’ll be taxed again on these funds upon withdrawal in retirement.  In a pinch, this can be a source of funds.  But, I urge caution.  Definitely see if you have other options and fully understand the impact of this loan.
  11. Important Dates – If you’ve chosen the Traditional 401(k) option and have stopped working, there will come a time where you are forced to take funds. The government mandates when you turn 70.5 years of age, you must start to annually take what they refer to as a “required minimum distribution.”   To determine amount, they use a formula based off of the prior year 12/31 balance.  Another key age is 59.5, which is typically the earliest you can take funds from a 401(k) without penalty. If you were to withdrawal funds prior to that age, you’ll be subject to the appropriate tax and a 10% penalty.
  12. Limits – The final provision worth noting is the contribution limit. I mentioned above the maximum you can put into a Traditional or Roth 401(k) in 2018 is $18,500 or $24,500, depending if you are age 50 or older.  Further, the maximum that can be contributed (including employer matching dollars and after-tax contributions) is $55,000 or $61,000, once again depending if you’re age 50 or older.

Understanding is key.

401(k) plans are a great resource, and usually the largest, to help fund retirement.  It’s important to understand all the moving parts in these vehicles.  There are many decisions to help personalize these plans to your unique needs.  Certainly, don’t hesitate to reach out if you have any questions or need help.  These plans are something we spend a lot of time advising on and a lynchpin to your financial success.

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Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients.  He coaches them through all stages of life and guides them to better achieve their life goals.  For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
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Find out more about David Levy, CFP®

Financial planning and Investment advisory services offered through Diversified Financial Consultants, LLC, a registered investment advisor. Securities offered through Securities Service Network, LLC, Member FINRASIPC .  Associates of Diversified Financial Consultants are registered representatives of Securities Service Network, LLC, a registered broker/dealer, 9729 Cogdill Road, Knoxville, TN 37932. (800) 264-5499.