Home Money 401Ks—Then and now

401Ks—Then and now



Throughout my career in the investment advisory business I have heard the line from clients and prospects alike, “My employer offers me a 401k but I don’t participate in it as it’s too complicated!”


They have attempted to read and understand the benefits of the plan but in their mind it’s all mumbo jumbo.  In this article I hope to clear up a lot of the confusion surrounding this excellent investment vehicle and encourage all workers who have one available to them to take full advantage of it.


401k’s came into being during World War II.  At the time when the country was on a war time production schedule, there was a shortage of labor to build the tanks and guns needed to win the conflict.  As a side note this was how women and minorities were given far greater opportunities in the work force than they would have had otherwise.  (This is how Rosie the Riveter came into being).  Yet there was still a serious labor shortage in critical industries and employers didn’t have the money to pay higher wages to entice individuals to come to work for them.


Thus the 401k or deferred compensation plan was born.  Employers enticed workers and prospective workers to come to their company with the promise that if they stayed, they would be paid a portion of their compensation at a later date and share in the profits of the company.


Fast forward to today and you have the modern incarnation of that same concept.  Typically the plan participant can defer a portion of their pay to take when they retire in the form of a salary reduction agreement. That money is then invested in a wide variety of brokerage products in order to grow the principle.  Most plans also have a profit sharing component whereby money they contribute to the plan is matched to a certain degree by their employer.  This is usually $.50 to $1.00 for every dollar the employee contributes.  But this usually does not kick in until the employee has been with the firm for a certain length of time usually one year.  This is more commonly referred to as vesting.  I prefer calling it free money!


It is at this point where, in my experience, the employee makes some big mistakes when beginning their participation in the plan.  As I have said before, I have seen people not participate at all because they could not understand the plan document outlining the features and benefits.  Other people wait to start their contributions to the plan until they qualify for employer matching and then only contribute up to the point that the employer matches.  Still other people decide that contributing to an IRA makes more sense than participation in a 401k.


They simply do not fully understand the full power of the 401k.  First off, most contributions to a 401k are automatically fully tax deductible, (except for Roth 401k’s).  An IRA may or may not be.  Secondly, all contributions are tax deferred until withdrawn.  Third, typically your employer pays the fees on the investments in the 401k, not you which can help compound your earnings at a greater rate.  In addition if you are having money deducted from your paycheck every month, you are taking advantage of dollar cost averaging.  In other words, not having to worry about the right time to invest.


Simply put, the 401k is the cornerstone of a well planned wealth accumulation strategy.  As an investor planning for the future, fully fund your company sponsored 401k as a first step in the process.  If you have funds left over after you have fully funded your 401k, then go ahead and fund your IRA.


Lastly, I have found that people who do go ahead and enroll in their 401k usually get tripped up by the huge selection of investment choices available to them within the plan.  I could write another full article on how to properly invest your 401k funds.  Suffice to say that one of the services I offer for free is a comprehensive evaluation of your 401k plan and the investment choices within it.  I can then develop and implement an investment strategy that fits your needs, time frame and risk tolerance.


Feel free to call me with any questions you may have.  I’ll be happy to talk to you, 480-296-9556.

Rudy Eidenbock

Purity Wealth Advisors,  4111 E. Valley Auto Dr. #104, Mesa AZ 85206

Office:480-307-9909, Cell 480-296-9556


Purity Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services Inc., Member FINRA/SIPC. 

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