Pascarella & Associates Blog

As pensions in the private sector become extinct, more workers will depend on their 401k savings to see them through retirement. The 401k get its name from the section 401(k) of the Internal Revenue Code which defines the Program. Invented as an executive perk — one more way to dodge Uncle Sam — the 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation’s retirement system. But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that’s exactly what happened.”

Back in 1981, the 401k as we know it was born when employees were allowed to make pre-tax contributions to their retirement accounts. This provided employees greater control over how their money was invested, a big departure from how pension programs historically were run. Congress was merely trying to close a loophole on executive bonuses when it created the 401(k). Most companies intended 401(k)s — which were originally called salary-reduction plans but then renamed for the portion of the tax code that makes them possible — to be a perk for highly paid executives, not a pension replacement. That’s because lower-paid employees probably could not afford to defer a portion of their paychecks. So companies held on to their pension systems even as they added 401(k)s, which by law they had to make available to all employees. When the market took off in the 1980s, the rank and file clamored to get in.

Today, about 60-percent of households nearing retirement have 401k-type accounts. The accounts for the earliest investors, who are now approaching retirement age, have an average balance of about $140,000. However, 401k’s were never intended to be an investor’s sole source of retirement money.

Some ideas on how workers can maximize their savings:

• The first step is to start participating early. The biggest mistake that people make when they have a 401k available is to not get into the game at all.
• Secondly, make sure to take advantage of your employers matching contributions, if available. If you don’t, you’re basically turning down free money. Many large corporations match the first six-percent a worker contributes.
• Next, increase your contributions. A worker can save up to $16,500 a year. Someone over 50 can take advantage of the “Catch Up Provision” which allows an additional $5,500 to be socked away.
• Make sure your 401k is appropriately diversified for your age and retirement goals.

Considering a 401k, or looking for a good alternatiove to these? Before making any significant changes in your retirement plans, it’s a good idea to consult with the financial professionals at Pascarella & Associates.