How do you know you have a lousy 401 (K) plan – what are your alternatives?

In general, most people have not saved enough money to retire. A recent Boston College study, as reported by the NY Times (5/3/2015, Section B1), said the average head of home 55 to 64 “had only about $ 104,000 in retirement savings.”

Gone are those days when you could receive retirement audits during your golden years because of the retirement plans set by employers. Today, the majority of private companies offer some kind of premium-defined plans, including 401 (k), which has shifted the burden for you to save and manage your retirement money. For example, to encourage you, your employer can contribute up to 50% of your contribution if you invest at least 6% of your annual wages. Some may contribute less or not at all.

You feel good to have a 401 (k) plan. However, once you inspect the high cost and limited amount of available funds in your plan, you realize that creating a nest egg for your retirement is more of a dream than reality. In addition, you are happy to defer your taxes now as they may be lower at the time of withdrawal upon retirement. However, the current trend of tax growth indicates that you may be paying more taxes than you expected.

Here are five ways to check your plan’s financial health and vital signs.

1. A pension plan is only as good as its funds. If your plan offers a limited number of mutual funds, your chances of creating a large diversified portfolio decrease. Some plans offer just a handful of mutual funds, while others offer a wider variety of funds, including Exchange Traded Funds (ETFs) with much lower costs and greater diversification. You may spend a lot of time creating a robust and appropriate investment policy. However, without the right funds in your 401 (k) plan, it would be difficult to mitigate portfolio risk and achieve your financial goals.

2. Cost is an important factor that can make or break your future nest egg. Investment funds usually have a high management fee. Investment funds with active management have much higher fees than the market indices with passive management. In addition to commissions and management fees, your plan can impose an annual maintenance fee for a low balance. Higher costs simply mean a lower return for your plan.

3. Not all funds are created equal. If you decide to absorb the usual high costs of mutual funds in your plan, you should consider their risk-adjusted performance. A Sharpe ratio measures a fund’s return relative to risk. Comparing different funds for their performance does not reveal the risk taken to achieve returns. In addition to a Sharpe ratio, you can use other risk measures such as Alpha and R Squared to evaluate funds in your plan. Alpha measures the fund manager’s performance and ability to generate returns. R Squared measures how close or far a fund has performed compared to its benchmark. Financial websites such as Yahoo and Morningstar tools should help you choose available funds in your plan based on the different risk measures.

4. Your employer does not contribute to your 401 (k). If your employer does not contribute to your plan, you do not have to invest in the plan. By investing in a limited plan, you end up paying too much without benefits to your employer. You are encouraged to find a better tax-deferred alternative to your 401 (k) plan.

5. Long waiting time schedule. If your plan has a long vesting schedule, you may have to turn in some or all of your employer’s contributions when you leave your current job. Some plans may have a waiting schedule that means you are not entitled to contributions from your employer unless you have been employed for a certain number of years.

If you realize you have a mediocre 401 (k), you have several alternatives to consider saving for your retirement.

IRA or Roth IRA

The Individual Retirement Account (IRA) is a tax-deferred retirement account available to individuals with earned income. Unlike 401 (k) opened and provided by your employer, you open your own IRA or Roth IRA account with a financial institution or a custodian. Within your IRA or Roth IRA, you can invest in stocks, mutual funds, ETFs and some other assets. An IRA or Roth IRA helps individuals save and invest for retirement. With a traditional IRA, the contribution is generally tax deductible because you postpone taxes to the future. While now you pay tax for Roth IRA and your withdrawals are tax free upon retirement. For Roth IRA, there are some eligibility requirements.

You can contribute to your traditional and Roth IRAs up to $ 5,500 (for 2014 and 2015), or $ 6,500 if you are 50 or older by the end of the year; or your taxable allowance for the year. According to the Internal Revenue Code (IRC), if you are single or head of the household with an Adjusted Adjusted Gross Income (AGI) of $ 61,000 or less, you can contribute to your IRA with a maximum contribution. Or if you are married and jointly or eligible widow (s) with a modified AGI for $ 98,000 or less, you can contribute to the amount of your premium limit. Your deduction may be limited if you (or your spouse, if you are married) are under a retirement plan at work and your income exceeds certain levels.

You can only contribute to an IRA or Roth IRA if you have earned an income. According to IRC, the following individuals are eligible for earned income; wages, salaries and gratuities, union benefits, long-term disability benefits received before the minimum retirement age, and net earnings from self-employment.

However, if you are not working but are married to someone who is, you can open Spousal IRA which can be funded by your working spouse for retirement.


To secure a better pension fund, an annuity is a valuable asset to consider in your retirement portfolio. An annuity is a contract issued by an insurance company that pays an income stream for a period of time or for a lifetime. Annuities can be immediate or deferred. An immediate annuity starts the payment flow as soon as it opens. Conversely, a deferred annuity payment does not start until a later date in the future. You can finance your annuity contract with a lump sum payment when you open it, called Single Premium Annuity, or you can pay some now and add more in future periods.

Annuities fall into three main types; Fixed Income, Equity-Indexed and Variable. A fixed income annuity pays you income based on a fixed interest as long as your fund continues to exist. It works like a CD, money market or bond. A stock indexed annuity such as fixed annuity offers a guaranteed minimum return while offering upside potential by investing in the stock market.

Unlike fixed-income and equity-indexed annuities that guarantee principal, a variable annuity includes sub-account that could lose the principle by investing in stocks, mutual funds, bonds, real estate, commodities and other assets. Variable annuities aim for a higher return by investing in a wide range of risky assets.

Common features of annuities

There are different types of annuities (i.e. fixed, deferred, variable), but they usually have the following common features:

Annuities are financial assets. You can purchase them individually or within your IRA as an investment vehicle and any type of qualified retirement plan such as a 401 (k) plan. Since it is a tax-deferred vehicle, an early withdrawal at age 59½ would result in a 10% fine by the IRS. However, insurers usually allow 10 to 20% of the principal to be withdrawn annually without penalty. An annuity has a decreasing early withdrawal plan, also known as a surrender fee. Usually it is the hardest in the early years; an annuity can charge 7% for admission in the first year, second year 6% and, for example, falls to zero percent in year 7.

You can invest as much as you want in annuities unless it is part of your IRA or 401 (k) plan, which is limited to the amount allowed. Some insurance companies can limit your annuity investment to a large amount of $ 5 million.

Advantages and Disadvantages of Annuities

One of the benefits of annuities is their deferred tax feature that allows you to save as much for retirement as you want. An annuity contract can earn you a lifetime income depending on the payout options you can choose. Some may guarantee an income for the rest of your life (or a single life), or your life and your partner is also known as a joint life. If one of your investment goals is to receive income, you should consider annuity for your retirement portfolio.

Annuities have some drawbacks such as fees, expenses and commissions. Income and withdrawals are taxed as ordinary income compared to lower rates for long-term capital gain. Your money is locked up. Although you can withdraw your money early, your withdrawals are subject to early redemption fees. In addition, as with any other retirement plan, you must pay a 10% penalty to the IRS before age 59½. In addition, annuities are not guaranteed by FDIC. Therefore, an insurance company’s financial guarantee is backed by the carrier’s creditworthiness and financial standing.

Annuities can improve your retirement portfolio. However, there are more details to consider before deciding on annuities as a viable asset for your retirement portfolio.

If your current 401 (k) plan is poor with high costs and limited funds that do not meet your investment goals and needs, seek help from professional financial advisers. The stakes are simply too high to manage your retirement plan as a do-it-yourself project.

Source by Dr Ned Gandevani