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The Short Answer

5 Ways to Maximize Your 401(k)

We offer some ideas to help you save more for retirement.

Fidelity’s retirement savings report highlighted many positive trends, showing that investors are upping their saving game. How do you stack up? Let’s break down five of the report's findings to see where you stand, and more importantly, what you can do to improve.  

1. Automatically Enrolled? Evaluate Your Investments and Savings Rate
Fidelity found that a record level 35% of employers now use automatic enrollment for their 401(k) plan. Automatic enrollment means a company diverts a certain percentage of an employee’s pretax salary into a retirement plan, meaning it’s opt-out, not opt-in. 

Auto-enrollment is an effective behavioral nudge. Fidelity found that 88.3% of workers participated in auto-enrollment plans while only 52.3% did when the feature wasn’t an option. That’s 36 more people per 100.

If you are auto-enrolled in your company’s retirement plan, stay enrolled. The sooner you start saving, the better. Plus, you won’t get used to seeing the money in your paycheck if it’s been allocated to retirement savings all along.

Here are some other things you can do if you're auto-enrolled: Evaluate your investment portfolio. Is it appropriate for your level of risk, and are your funds relatively inexpensive? (Often the default choice for auto-enrolled employees is a target-date fund.) Next, check the contribution percentage your employer set up for you. If it’s on the lower end, like 3%, consider raising it.  

2. Get Your Company Match
Employer contributions to retirement plans have increased over the past five years, according to the study. 

Some companies match employee contributions, up to a certain percentage. If you can’t afford to save any more, try to contribute at least enough to maximize your company’s match. For instance, let’s say a company matches 50% of 6%. That means they’ll add 50 cents for every dollar you contribute, up to the first 6% of your salary. So, make at least a 6% contribution to get all of the free money. 

3. Consider Using the Auto-Escalation Feature
The report also found that workers are saving at a higher rate. Employees save an average of 8.8% of their income, roughly one percentage point more than 10 years ago. 

Whatever your savings rate is, consider raising it by a percentage point because the effects can be substantial. Even if that increase only translates to saving $500 more a year, doing so for 40 years at a 7% return rate means you’d add roughly $100,000 to your retirement nest egg. (And that assumes your salary will remain the same over your career, though it will probably grow, too!) 

A way to multiply this effect is to sign up for auto-escalation if your 401(k) plan offers it. This feature increases the percentage of income saved each year by a bit. By slowly increasing your contribution, you won’t feel a drastic change in spending, but your long-term savings will skyrocket. 

4. Consider a Roth 401(k)
Fidelity also found that more companies are offering a Roth 401(k) option, but participation is still puny at 11.4%.

Young investors should seriously consider parking funds in a Roth 401(k). That’s because Roth accounts tax all money when it enters--but never again--while a traditional account only taxes money taken out in retirement. A Roth is better if your current tax bracket is lower than your predicted bracket in retirement, since you’ll pay less in taxes. This situation is common for those who are early in their careers and have not yet reached their peak earnings.

Splitting contributions between both accounts can also be a solid money move, because you can choose whether to pay taxes on your income in retirement or not.

5. Look into a Workplace Managed Account
In 2019, a record 29.7% of employers offered a workplace managed accounts program, an option where someone else chooses the investments in your retirement account. However, only 3.5% of employees with the option participated in the program. 

Workplace managed accounts have pros and cons. A pro is that it uses information like your salary to create a more-personalized investment plan. This can result in a more-optimal asset allocation. However, the con is that this comes with management costs, which can outweigh personalization benefits. 

Pay particular attention to the overall cost of the workplace managed accounts service, including the expenses for the service and the underlying holdings. If your plan offers a target-date fund, which offers a standardized asset allocation for the group’s retirement date, it can be a helpful comparison tool. Specifically, you can compare the overall cost for both, which should include the expenses of the underlying funds for each.