Labor Day, celebrate 401(k) Day
year we honor the achievements of American workers on Labor
Day by taking the day off and having a barbecue.
You may not have heard about it, but the day
after Labor Day is another important event -- 401(k)
Day. It's largely a symbolic holiday that can take place any time
of the year, designed by the financial industry to raise our consciousness
about retirement savings. In preparation for this event, the Profit
Sharing/401(k) Council of America, or PSCA, created
a superhero action figure -- Captain 401(k) -- whose
mission is to combat his arch nemesis, the savings procrastinator.
That would be anyone who has access
to a 401(k) plan but hasn't yet signed up. Or it would
be those of us who are signed up, but are deferring an inadequate
amount of savings. We can be our own worst enemy when we neglect
such an important matter.
Captain 401(k): No excuses
Too young? Too old? You've
already saved up a tidy sum? You've saved absolutely nothing? You have too many
bills? You know nothing about investing? None of these are good reasons to forgo
contributing to your company's 401(k) plan if you're lucky enough to work for
a company that offers one.
If you're already maximizing your
401(k) plan or another type of defined contribution
plan at your workplace, then you understand the importance of saving
for retirement. But if you've put off
a decision about enrolling in a 401(k), a 403(b)
for nonprofit workers, or a 457 plan for government workers, then
listen up: It doesn't matter what your circumstances are. You must
conquer inertia and sign up for your company's retirement plan at
your next opportunity.
Why is this so important? Because
the days of working for the same employer for 30-odd years and getting
rewarded at the end of that time with a retirement
pension are history. Only 20 percent of the private sector workforce
has access to a traditional pension plan, and not all of them will
get the payout they've been promised. These "defined benefit"
plans require a lot of funding by employers, which explains why
some are filing bankruptcy to avoid funding them further. And it's
not only the airlines that are affected. American businesses reported
shortfall of $353.7 billion in their latest filings" about
their underfunded pensions with the Pension Benefit Guaranty Corp.
Social Security, the one leg of
the three-legged retirement footstool that we could always depend
on, is wobbly right now. Some academics
believe the fiscal imbalances caused by Social Security and Medicare
combined threaten to throw our country into bankruptcy. Congress
has spent the better part of this year debating how to make Social
Security fiscally solvent and palatable to the American public.
We don't know what the final outcome of this debate will be, but
chances are good that benefits will get cut and taxes will increase.
So while you may get some type of Social Security stipend during
your old age, don't count on it to pay all your bills.
places the responsibility of your retirement squarely on your own shoulders. Feeling
burdened? The longer you wait, the heavier it gets.
vs. 401(k) plans
You can invest in other investment vehicles, such as a traditional
IRA (though these are subject to certain deductibility or income
restrictions). IRA assets make up the largest component of the retirement
market, at $3.5 trillion as of year-end 2004, according to a report
from the Investment
Company Institute. Many of these vehicles are funded by rollovers
from 401(k) plans -- more about that later. Defined
contribution plans hold another $3.2 trillion, with two-thirds of
that amount in 401(k) plans.
IRA contributions are stringent; the maximum amount you can invest in 2005 is
$4,000 ($4,500 if you're 50 or older). In a 401(k), you can contribute as much
as $14,000 in 2005 and an additional $4,000 if you're 50 or older. In 2006, the
contribution amount allowed in 401(k) plans increases to $15,000; $20,000 for
the 50-plus set.