When you arrive at your first job after graduation, HR hands you lots of forms to complete. One of the things they are likely to provide you with is information and enrollment forms for the company's 401(k) or other employer-sponsored retirement plan. While retirement will seem a long way off, don't automatically ignore those forms — it is important to start saving as soon as you are able to. Your contributions to an employer-sponsored plan are typically pre-tax, which means they are deducted from your pay before taxes are taken, thereby lowering your taxable income. Many companies have a contribution match (they add funds to your account based on how much you contribute) and you might be leaving money on the table if you choose not to participate in your employer sponsored plan.
Kristen Deevy (Fin '92), managing director of retirement plans for Pensionmark Financial Group, provides the following suggestions for some common concerns.
I have lots of expenses and an entry-level salary. Shouldn't debt payments (i.e. student loans, car, etc.) be my priority?
Newfound independence and entry level jobs may lead to overspending and credit mistakes, so it's critical to learn how to balance needs and wants. Most experts would agree that you should avoid racking up too much debt and try to start building good saving habits. While you want to pay down debt, it's a good idea to start saving even if it's at a very small amount.
This is my first job, and I don't know that I'll be with this same company for very long. What’s the point of starting a retirement account with them? What would happen if I left my company for a new job?
Most companies offer a retirement plan like a 401(k) or 403(b), and any money you contribute to the plan may be taken with you to your next job, so consult your plan documents. If the company makes a contribution on your behalf, it may or may not be able to move with you, but the money you contribute will always be yours. What happens with company contributions depends on the vesting schedule of your company retirement plan. Think of vesting as ownership — your contributions are 100% vested whereas the company contribution may be subject to a longer vesting schedule. If you do decide to leave before you are 100% vested in the company contribution, you would be eligible to move everything you contributed plus whatever portion of the company contribution you were vested in. Moving your retirement account funds when you change jobs is called a rollover and they are common. Typically, rollovers are handled via some standard forms once the new retirement account at your new company is created.
Ok, I agree that this is something I should do, but I have a lot of paperwork and am not sure what to choose when signing up. What are things I should think about when reviewing the available investments?
Some companies may automatically enroll you in their retirement plan, and other companies may require you to actively select and enroll. Ask HR if they have any enrollment or education resources, whether that be a short enrollment video that discusses how the plan works and the funds it offers or a website to review. Or you may also ask if there is an independent retirement plan advisor that can assist with answering any questions you have about the plan.
I want to start a retirement account, but I found out that my company doesn't offer one or I am not eligible. What should I do?
If no plan is available or if you have to wait a period of time before you can enter the plan, you can always save on your own by considering an Individual Retirement Account (IRA). These are widely available from banks or brokerage firms. Many companies also offer Health Savings Accounts (HSA) which may work similar to a retirement plan. Many of these plans also offer the ability to invest in mutual funds, just like a 401(k) plan. However, in some ways it may potentially be better than a 401(k) plan, in that there are three tax advantages. Money goes into the HSA pre-tax/tax deductible, the money in your plan grows tax-free, and then when you take it out, assuming you use it for medical expenses, it is tax-free. If you decide to take it out for reasons other than qualified medical expenses, there is a penalty (if you are under the age of 65). Review the pros and cons of an HSA.
Do you have any other advice or resources to recommend?
There are a lot of financial wellness resources available, whether through an independent advisor or online. Many companies are offering services where you can call in to get assistance in navigating your retirement plan strategy. Ask HR if there are financial educational webinars available on a variety of financial topics. You can educate yourself with a variety of tools and resources such as educational videos, webcasts, financial calculators, articles and newsletters that can help navigate your financial choices. Another resource that can be helpful is asking an independent advisor for a gap needs analysis to see if you are on track to meet your retirement goals (it will help determine how much you need to save before retirement, based on your goals). Such resources can provide employees with personalized tools to help you manage your progress and if needed, offer ideas on how you can adjust your financial strategy.
The University of Colorado Boulder does not recommend or endorse Pensionmark Financial Group, LLC. Pensionmark Financial Group, LLC is an investment advisor registered under the Investment Advisers Act of 1940. Pensionmark Financial Group does not provide tax or legal advice. Please consult with a tax professional prior to deciding on any distribution option.
Kristen Deevy (Fin '92) is managing director of retirement plans for Pensionmark Financial Group.