Contributions

Life goes by quickly. The tax code is fluid, and there are only so many hours in a day.  A lack of time can tempt people to reduce their investment decisions to the lowest common element. But be wary of falling into silo thinking or compartmentalizing information. Looking at all available resources, especially when making retirement decisions, can be a game changer.

It is common to meet a young family comprised of two children and both parents working.  Each parent’s employer may offer 401(k) plans at work, and they may have an “adult conversation” agreeing to save a certain percentage of their earnings in their employer-sponsored retirement accounts. Kudos to them! Perhaps they’ve even discussed whether their retirement contributions should be made into Roth (not tax deductible today but growing tax free forever) or traditional (deductible today) accounts.  Kudos again! But too often, this is where the conversation turns into silo thinking.

The Department of Labor creates the rules governing all 401(k) plans and oversees changes to plan documents and necessary updates. That doesn’t mean all plans work the same.  For instance, while a 401(k) plan can have a loan provision, that doesn’t mean your plan has that provision. (Remember my advice about knowing what you own?) The same is true for the Roth option.  Although all plans are permitted to offer that option, many do not and that is a shame.

Let’s name our couple Jack and Jill and pretend they both earn $40,000 annually.  They have decided to contribute 7% of their income to their respective employer’s retirement plans. Jack’s plan matches $0.50 up to 6% of his income but offers no Roth provision. It does, however, have a great fixed income money manager as an investment option, although it lacks in quality international equities.

Jill’s plan matches $0.50 up to 4% and allows for the Roth option. Her plan also has a loan provision which Jack’s does not. The money managers seem to be adequate across the board in all asset classes. While this example may seem overly simplistic, it represents what we see in “real life” more often than you might expect. The clear and easy answer is to get out of the silo and start coordinating saving efforts for the benefit of the couple!

Both Jack and Jill should be contributing enough to get their employers’ match. It also stands to reason that Jack should have a larger percentage of his assets held in the fixed income account deemed to be a truly great performer of both return and risk. Jill’s contribution should be allocated based on the couple’s comfort level and perhaps with a slight decrease in fixed income to offset the concentration in Jack’s plan. If the decision was made to use the Roth option, the remaining dollars should go toward Jill’s plan. While the savings are in individual names, the ultimate objective is the couple’s retirement. Save together and save smartly.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.