401(K) AND 403(B)
We’ve touched lightly before on the importance of worker contributions to 401(k)s and 403(b)s. Let’s just leave that subject by saying that, to the best of your ability, you should be contributing as much as you can afford while still leaving enough money to live your life. The virtue of long-term tax-deferred investing is literally indisputable in this day and age. As stated previously, Social Security will not and never was intended to be your entire means of support in retirement.
That having been said, in a society where nearly 20% of the people change jobs every couple of years, we ought to spend a moment longer discussing the portability or transferability of 401(k)s and 403(b)s. You recall, your 401(k) retirement programs are basically found in industry, while 403(b)s tend to be in the education, healthcare and non-profit organization areas. They are similar but not identical.
The biggest difference is that a 401(k), under normal circumstances, can only be moved or transferred if a person leaves their current employer. A little known fact is that under normal circumstances large portions of 403(b)s may be moved away from a current employer, even while you’re still working for the company or organization.
Why would you do it? Two answers are quite simple – first, for more and better choices, and second, for professional help. Most retirement programs, whether 401(k)s or 403(b)s, have a limited, preselected group of investment choices. In fact, most of the time, you don’t get a choice as to the overall list. If however you have the ability to roll away into what would be then a self-directed account; you’d obviously pick up all the choices in the world.
That of course is a two-part problem and blessing. The blessing is that with more choices, you theoretically ought to make better picks, and therefore make more money, but the problem is are you really qualified to make those decisions alone? The honest answer is, probably not. So the problem in that case is often solved by getting involved with a full-service investment professional who will help you make your choices.
Interestingly enough, with most of the people I talk to, they have some sort of broker who is helping them with their non-qualified (money already taxed) investment money, which is often many times smaller than their qualified (pre-tax money) company 401(k) or 403(b). Getting help for that much larger pool of money, which should represent the lion ‘s share of your retirement reserve somewhere down the line, I think makes a lot of sense.
Most financial professionals should be more than willing to help and advise you concerning your 401(k) or 403(b) money, whether or not they’re directly involved in the management of that money. They ought to do that as a service. Then, if they help you and they do a good job, when and if it’s time for you to retire or move on to another job, that may be the time that you decide they deserve to actually gain control of the money and help you with it on a full time basis.
The bottom line on all of this – manage your 401(k) and 403(b) to the best of your ability. Don’t ignore the possibility of rolling the money over to a self-directed account, if you have the opportunity, since you ought to pick up many more choices and some professional help along the way. Don’t be ashamed or afraid to ask your investment professional for assistance, even while the money is still at the company. They should do that as a part of their overall service.
One final thing – don’t ignore performance. Performance is very important. Simply put, the amount of money you have when you retire will largely determine the quality of life you will have in retirement. Now, granted, everyone has a different risk tolerance, but the facts are that since 1926 through the end of last year, stocks, as represented by the S&P 500 have averaged a compounded annual gain of 11.22%. During that same time, government bonds have averaged just 5.35%, while Treasury Bills have averaged 3.77%. Simply put, different rates of return over long periods of time can make an enormous difference in your ultimate retirement funds.
(Tom Butenhoff is a First Vice President with J. E. Liss & Company in Milwaukee. The views are his and not necessarily those of Liss Financial Services or the Job Connection/Hiring Network.)