By William H. Black Jr.
Does the self-storage company you work for sponsor a 401(k) plan? If so, your employer has no doubt paid careful attention to plan design, underlying investment options, and employee awareness and comprehension of the plan’s features and benefits. Everything seems perfect. But even when employers and employees have the best intentions, things can go wrong.
Following are the most common mistakes I see self-storage employees make in regard to their 401(k) plan. The biggest is failing to participate. Now let’s look at some other issues that can create under performance.
Mistake 1: Leaving Retirement for 'Tomorrow'
Many employees who are eligible for participation in the company 401(k) plan put it off until the “next enrollment” because of this or that reason. The sooner you start saving, the more you’ll have at the targeted date. When we’re 25, we never think about being 65, yet it comes so fast!
Taking advantage of a company’s 401(k) plan has many benefits. Your contribution is income-tax deductible. The employer’s match can be looked at as “free money” and a “free return on investment.” Over time, those contributions, plus any earnings, can create quite a sizeable account value. Keep putting it off and miss the opportunity—that’s a mistake!
Mistake 2: Not Deferring Enough
Many new plans have automatic enrollment. In other words, an employee is automatically enrolled and 3 percent of each paycheck is automatically withheld and sent to his 401(k) account. To opt out of the plan, he has to elect not to participate.
This is simply a start, however. Saving out 3 percent of your income is not enough to effectively get the job done for retirement. Employees should increase this deferral percentage to somewhere around 10 percent to create a more robust savings. It’s simple: Save more and spend less! Once the decision is made to withhold those additional monies from the paycheck, they’re hardly missed. It's amazing what “stuff” we really don’t need.
Mistake 3: Ignoring the Benefit of the Employer’s Contribution
If your employer will match your contribution dollar for dollar up to 3 percent of salary, look at that as a 100 percent gain. You put in $100, your employer puts in a $100 match, your account now has $200 in it, yet only $100 is out of your pocket! Add on the investment results, and you are on your way! This ignores the tax benefits you get from the contribution being deductible from your taxable income. Add it all up, plus the time value of money, and the future account value can be quite significant.
Mistake 4: Never Changing Asset Allocation
When you enroll in a 401(k) plan, choices have to be made as to where your contributions will go. In other words, which investment options will you, the participant, choose? That’s where it starts. However, those choices should not, generally speaking, be permanent and should be monitored and changed when appropriate.
It’s remarkable how many participants never change the initial investment choices. Don’t be that person! Are you using the same cell phone you were using 10 years ago? Of course not! Investment options in a 401(k) plan need changing from time to time, too.
Mistake 5: Withdrawing or Borrowing From the Account
Need a loan? Usually it’s best to get it anywhere other than from your 401(k) account, even if you do have the discipline to repay it. Loans and withdrawals have more devastating results in reducing the account value than many, if not most, other factors. Withdrawals (not loans) are taxable as ordinary income and subject to a 10 percent excise tax if you’re under the age 59.5. That money is now unavailable for investing and future uses.