It's Open Enrollment Time!

Your 401k plan can be a very lucrative part of your overall compensation, if you know how to use it. The open enrollment period — during which employees can change their benefits elections — is an important time to make sure you're getting the most out of all your employee benefits, including your 401k.

But, if you miss your window of opportunity, you could lose out for a long time.

When employees get an open benefits enrollment announcement from their employers to sign up for a 401k, it's understandable if they just want to shelve that notice and worry about other, more immediate concerns. But, decisions made during open enrollment can have a significant effect on a person's financial well-being, both now and in retirement.

Why Open Enrollment?

The open enrollment period is not only a time when newly eligible employees can enroll in their company's 401k, it's also a chance for tenured employees to sign up if they haven't before. Some companies let you sign up or change your deferral rate at any time. But a number of companies only let you do this during periods of open enrollment, which typically last about a month and usually happen once or twice a year. This helps keep administrative and plan costs under control.

November is a popular month for open enrollment, with the changes going into effect Jan. 1 of the following year. May and June may also be open enrollment periods, with changes starting July 1.

Most benefits programs offer the basics: a 401k plan, medical insurance, and other kinds of insurance. The full package of benefits varies widely from employer to employer and can change at any time, so it's important to get a full review of what's available from your human resources department.

Don't Miss Deferring

You could miss out on a healthy chunk of retirement cash if you choose not to enroll in a 401k for a whole year. For example, if you earn $40,000 a year and normally contribute 10 percent to a 401k, skipping a year will cause you to lose out not only on the $4,000 in retirement savings but also on any return on investment you would accrue over that year.

Further, if your employer offers to match your contributions (as most do), then not contributing enough to get the match is like turning down a pay raise. For example, suppose you earn $40,000 a year and your employer offers the typical 401k match of $0.50 on every $1.00 you contribute, up to 6 percent of your salary (in other words, the employer match equals 3 percent of your salary). In this case, contributing enough to get the full match would add another $1,200 per year to your account at no additional cost to you. (The chart below does not show return on investment.)

"When the employer offers a matching contribution, the single-best tax-deferral instrument available for most working people today is the 401k plan," says Jeff Tuccy, a plan design specialist in Denver. That's because the match gives you an immediate return on your investment.

"Unless your situation is very unusual, you should make sure that you are contributing at least enough to get the full amount of matching money offered by your employer while the open enrollment period is still here," Tuccy said.

Are You on Track?

Even if you are already enrolled in your employer's 401k plan, the open enrollment period is an excellent time to review your retirement plan. Make sure that you are contributing enough to meet your retirement goal. To see if you are saving enough, visit our 401kalculator. During open enrollment, you can change your 401k deferral amount; so, if you're not on track, you can increase your contributions to catch up.

While you're at it, look into any changes that your plan has made over the past year. For example, the plan may have added new investment options or the fee structure may have changed.

Most financial planners agree that one of the most important parts of staying on track for your retirement is to make sure that you use proper asset allocation in accordance with your risk tolerance. According to a study by the Investment Company Institute, fewer than one in five 401k participants rebalanced their accounts or made asset allocation changes in the period from Sept. 1997 to Aug. 1998.

Even if you direct your payroll contributions to various 401k funds according to your asset allocation profile, you should still rebalance your assets at least annually. Money in different asset classes tends to grow at different rates. The longer you go without rebalancing, the further out of line your portfolio will be with the allocation profile that you wanted to build.

Few employers will make you wait a whole year to transfer your 401k money between funds — in fact, most let you do this daily — but the open enrollment period is as good a time as any to review your balances and choices.

Tips to Succeed

Depending on the benefits provided by your employer, you may have several ways to defer, or even eliminate, taxes on a portion of your income. If your employer offers flexible spending accounts, you can sign up to contribute pretax money to an account that pays for certain expenses. If you have fairly consistent unreimbursed medical or childcare expenses, these plans can be a definite plus. But remember: In many cases, if you don't use the money you've put into a flexible spending account by the end of the plan year, you lose it — so budget your contributions carefully.

"The single-best tax-deferral instrument available for most working people today is the 401k plan." — Jeff Tuccy, a plan design specialist in Denver.

While every person's situation is unique, here are a couple questions you can ask yourself during open enrollment to figure out how you might change your benefits to better meet your needs:

Has your life situation changed? For example, marriage, a new child or a new home all present new financial planning challenges. Open enrollment may be the only time during which you can adjust your 401k contribution amount, add your spouse to your medical coverage, or increase your coverage under employer-sponsored disability insurance.

Are you saving enough to meet your retirement goals? Open enrollment is a good time to review your progress. If you are coming up short, you can increase your contribution amount before the open enrollment window closes.

Open enrollment periods usually last for one or two months. If you miss out, you'll have to wait until the next one, which could be a full year later. So, think twice before putting that open enrollment memo aside. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.