Do you read every update your employer sends about your retirement plan? Before you answer, let me make a confession: I don’t-and I work in retirement! We all have demands on our time. It’s just not possible to keep up with everything we feel we need to know.
My reason for asking is that depending on how long it’s been since you were hired, there may have been changes that reflect your plan sponsor’s latest best thinking about how to help employees save more, invest appropriately and plan for retirement spending. And that’s great news—as long you are benefiting from them.
There are a variety of reasons why certain plans put changes in effect for new hires only. That means if you’ve been with your employer since before the latest changes were made–you may need to take action to take advantage.
So what should you do? Even if you prefer to make your own investment choices, it’s a great idea to compare yourself against what your plan does for new employees. The defaults for new employees are probably posted online or available for the asking from your HR office. Once you have the details, here are a few things to look for:
Are you saving enough?
This may not be as obvious as you think. Let’s say new employees are defaulted in at saving 5% of their salary. That’s not necessarily where you should stop saving. Is there a feature that raises savings rates every year up to a certain ceiling–say 10 or 15%, or higher? That ceiling may be closer to what most people want to set aside. If you’re below that level, you may want to consider making an increase or enrolling in an automatic annual increase (often referred to as “auto-escalation”).
Are your investments age-appropriate?
The reason so many plans offer a target date fund as the default investment option is that where you are in your career should play a major role in determining your appropriate balance of risk and return. If you’re not in your plan’s target date fund–by choice or because you’re still in a previous default – the new default can be an excellent benchmark in two ways.
- If your portfolio is significantly different from the target date fund allocations set for your current age, ask yourself why – and whether you’re comfortable with that difference. For example, a 65-year old who is 100% in stocks or a 25 year-old who is 100% in a money market may find that compared to the target date fund, the older person may have too much risk and the younger too little growth potential.
- The other benchmark is returns. While many of us assume we want to make the maximum amount of return at all times, that’s not always (or even usually) the case. First, compare the yearly average of the longest term returns possible; last year’s returns alone will tell you little about an investment you may hold for decades. Next, take a look at year by year returns, and pay careful attention to periods of tough markets. Imagine yourself in the last few years before retirement; would a steep decline force you to change plans?
Are you doubling-down on company stock?
A common practice of some companies has been to offer company stock as a match and/or as an investment option. But this approach has been in decline for some time. Current best practice suggests that holding too much of any single stock is a concentrated risk. If that single stock happens to be the company you work for, keep in mind that you are already “invested” in your firm’s financial future since you depend on it for future employment. If company stock is a large part of your retirement plan, take a look at where you stand and you may want to consider re-balancing into a more diversified investment.
Even if you are a committed do-it-yourself investor, bench-marking your choices against your plan’s current best thinking is a great exercise that may help you discover a new approach to achieving your retirement goals.