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.
The transition from fall to winter is a time when most people have
a lot of financial concerns on their minds, such as holiday
travel, gifts, and planning for that April 15th tax bite in 2001.
And, the recent volatility in the markets has only served to
heighten concerns about money.
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
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
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
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
"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,"
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
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
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.
single-best tax-deferral instrument available for
most working people today is the 401k
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.