401(k) Tips and Useful Information
by Charles Rotblut | September 08, 2022
Tomorrow (Friday) is National 401(k) Day. It will also be National Wiener Schnitzel Day, but I’m going to set my (limited) culinary skills aside and focus on defined-contribution plans. I have some details and tips for those of you who are working and for those of you who are retired and still have a 401(k) plan. Much of what I cover also applies to 457(b) and 403(b) plan accounts.
401(k) Contribution Limits—The cap on contributions is one of the most queried questions on Google when it comes to 401(k) plans. In 2022, up to $20,500 can be contributed. Those age 50 or older can contribute an extra $6,500, bringing the maximum contribution amount to $27,000. In contrast, the 2022 contribution limit for individual retirement accounts (IRAs) and Roth IRAs is $6,000 with an additional $1,000 catch-up contribution for those age 50 or older.
2023 401(k) Contribution Limits—I don’t expect the IRS to announce next year’s limits until November. In August, asset manager Mercer projected that the 401(k) contribution limit will increase to $22,500, with a $7,500 catch-up contribution. We’ll list the actual increase in our tax guide this December. (I have not seen projections for IRA contribution limits.)
Increase Your Contribution Amount With Every Raise—Almost 70% of defined-contribution plans that are run through Vanguard automatically raise employees’ contribution rate (auto-escalation). The average deferral rate was 7.3% last year. Adding the employer match raised the average contribution rate to an estimated 10.4% last year. Boosting your total contribution rate to 15% of your income (20% for those 50 or older) will improve your odds of saving enough. A simple way to get there is to voluntarily boost how much you contribute with every raise.
Know Your Allocation—Target-date funds account for the sole investment of 70% of workers participating in defined-contribution plans run through Vanguard. These funds provide age-appropriate allocations to stocks and are a good default option for many people. Investors who are knowledgeable and disciplined can do better by creating and implementing their own long-term allocation (such as one based on our allocation models). Whichever path you go down, allocations only work if you stick with them.
Keep an Eye on the Fees—In a 401(k), there are fees charged by each fund (expense ratios and possibly loads or redemption fees). Opting for the lowest-cost funds offered by the plan is a very good rule of thumb. There are also administrative fees. These might be charged outright or deducted from your returns. You may encounter other fees [e.g., commission or redemption fees for an annuity offered through a 403(b) plan]. If the fees are high, it can still be advantageous to contribute at least enough to maximize the employer match.
RMDs Mostly Start at Age 72—Required minimum distributions (RMDs) from 401(k) and Roth 401(k) plans—yes, Roth 401(k)s too—will start at age 72 for most people. RMDs from defined-contribution plans, such as 401(k) plans, can be postponed beyond age 72 by those who are still working, contributing to a defined-contribution plan and own less than 5% of the company.
Separate RMDs Must Be Taken from Each 401(k) Account—If you personally own more than one 401(k) account and are subject to the RMD rules, you must take the RMD from each 401(k) account separately. In contrast, if you are required to take, say, $5,000 from IRA #1 and $5,000 from IRA #2, you can take the combined RMD of $10,000 (the sum of the separate RMD amounts for each account) from either IRA #1 or #2. Similarly, you can combine RMDs from two or more different 403(b) plans.
Check and Keep Beneficiary Information Updated—As is the case with any other financial account, it is very important to check and keep updated the beneficiary information on your 401(k). Update the information if there is a change involving beneficiaries. In doing so, make sure all necessary forms are signed and any needed documentation [e.g., a qualified domestic relations order (QDRO)] is provided.
Limit How Much You Look at Your 401(k) Account—Retirement savings accounts like 401(k) plans should be managed with a long-term point of view. If you frequently look at them (even if just monthly), you’ll notice the volatility of your account balance. This frequently leads to short-term decisions with harmful long-term effects being made. A better strategy is to only look at your 401(k) account (and statements) once per year or perhaps twice a year at most.
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AAII Sentiment Survey
The results from the latest AAII Sentiment Survey show optimism about the short-term direction of the stock market falling below 20% for the first time in nine weeks. At the same time, pessimism rose to an 11-week high.
Bullish sentiment, expectations that stock prices will rise over the next six months, declined 3.8 percentage points to 18.1%. Optimism was last lower on April 28, 2022 (16.4%). This is the 25th lowest weekly reading in the survey’s 35-year history. The pullback keeps bullish sentiment below its historical average of 38.0% for the 42nd consecutive week.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 1.0 percentage points to 28.7%. Neutral sentiment is below its historical average of 31.5% for the 18th time in 20 weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.9 percentage points to 53.3%. Bearish sentiment is above its historical average of 30.5% for the 41st time out of the past 42 weeks and is at an unusually high level for the 26th time out of the last 34 weeks. The breakpoint between typical and unusually high readings is currently 40.5%.
The bull-bear spread (bullish minus bearish sentiment) is –35.2% and is unusually low for the 27th time in 33 weeks. The breakpoint between typical and unusually low readings is currently –10.9%. The bull-bear spread has also broken its second-longest streak of negative readings, as sentiment has remained in favor of bears for the 23rd week in a row.
Historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and the bull-bear spread. The S&P 500 has also realized above-average and above-median returns following unusually high levels of pessimism.
Continued volatility in the major stock indexes along with inflation, corporate earnings and increased chatter about the possibility of a recession are all likely weighing on individual investors’ short-term expectations for the stock market. Also influencing sentiment are monetary policy, politics and the ongoing invasion of Ukraine by Russia.
Bullish: 18.1%, down 3.8 points
Neutral: 28.7%, up 1.0 points
Bearish: 53.3%, up 2.9 points
Bullish: 38.0%
Neutral: 31.5%
Bearish: 30.5%
See more Sentiment Survey results.
AAII Asset Allocation Survey
Cash allocations declined in August, while fixed-income and equity allocations both increased slightly. The August AAII Asset Allocation Survey shows fixed-income allocations rising to their highest level in six months.
Stock and stock fund allocations increased by 0.5 percentage points to 64.5%. This increase keeps equity allocations above their historical average of 61.5% for the 27th consecutive month.
Bond and bond fund allocations increased by 0.7 percentage points to 14.4%. Bond and bond fund allocations are also below their historical average of 16.0% for the 18th consecutive month.
Cash allocations decreased by 1.1 percentage points to 21.2%. August was the 28th consecutive month that cash allocations have been below their historical average of 22.5%.
Optimism among individual investors about the short-term direction of the stock market in our weekly Sentiment Survey improved during the first half the month before pulling back during the second half. Bond yields rebounded off the summer low and potentially attracted yield-seeking investors.
It is worth noting that sentiment does not always result in altered allocations as many AAII members follow a long-term approach to investing.
- Stocks and Stock Funds: 64.5%, up 0.5 percentage points
- Bonds and Bond Funds: 14.4%, up 0.6 percentage points
- Cash: 21.2%, down 1.1 percentage points
- Stocks: 30.4%, down 0.7 percentage points
- Stocks Funds: 34.1%, up 1.2 percentage points
- Bonds: 3.0%, down 0.4 percentage points
- Bond Funds: 11.4%, up 1.0 percentage points
- Stocks/Stock Funds: 61.5%
- Bonds/Bond Funds: 16.0%
- Cash: 22.5%
Take the Asset Allocation Survey.
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