Optimizing Your 401(k)

Optimizing Your 401(k): Emerging Trends and Expert Strategies

The 401(k) is the dominant source of retirement savings for many Americans. Given their tax advantages and flexibility, these employer-sponsored plans—which allow employees to contribute a portion of their income, often with employer matching—have steadily grown in both popularity and accumulated assets. American workers have amassed $7.4 trillion in these savings vehicles¹, and 75 percent of Americans are “somewhat” or “very” confident that 401(k) and other employer-sponsored retirement plan accounts can help them meet their retirement goals².  

Still, many employees don’t fully leverage this important savings tool as part of their diversified investment strategies. Understanding the available options and the latest trends in 401(k) planning can help individuals maximize their retirement benefits and ensure financial security. 

TRADITIONAL 401(K)S 

Setting aside a portion of your salary in an employer-sponsored 401(k) account yields a number of key advantages. For high earners and those who expect to be in a lower tax bracket when they retire, traditional 401(k)s are particularly advantageous. Contributions are made on a pretax basis, helping to lower your current taxable income. Earnings on 401(k) investments are tax-deferred, allowing dividends and capital gains to accumulate tax-free until withdrawn in the future, often at a lower tax rate. It is important to know that taxes apply to future distributions from Traditional 401(k)s, and there can be penalties if you take any nonqualifying distributions before age 59.5   

Many employers offer matching contributions, which can significantly accelerate the growth of your retirement savings. Some employers even contribute a portion of company profits to their employees’ 401(k)s. If your employer offers these benefits, it is highly advisable to take advantage of them.  

The IRS does limit the amount ($23,000 for 2024) that you can contribute yearly to your 401(k). Workers age 50 and older can make “catch-up contributions” (up to an additional $7,500) above that threshold, which is generally recommended for those with excess capacity to save for retirement. 

PLANNING WITH ROTH ACCOUNTS 

Unlike traditional IRAs and 401(k)s, Roth IRAs and 401(k)s allow individuals to save and invest money that they have already paid taxes on, generally making future withdrawals of those contributions tax-free, and allowing tax-free distributions of account earnings during retirement. For some, a combination of Roth IRA and/or traditional 401(k) contributions can be used to create a balanced tax strategy, offering flexibility in managing future tax liabilities. With the possibility of rising future income taxes, Roth accounts could become especially advantageous. 

Recent provisions of the Secure Act 2.0 have expanded the use of Roth accounts, including allowing transfers from 529 college savings accounts to Roth IRAs. With careful navigation of these complex rules, savers can leverage these increasingly popular tools.  

SELF-DIRECTED 401(K) PLANS 

With traditional 401(k)s, employers decide who manages the investments, and the investment options themselves can be narrow. Some employers now offer self-directed 401(k)s that give employees more freedom in their investment choices. These plans include options beyond just mutual funds, exchange-traded funds, stocks, and bonds, such as real estate, private equity, and other alternative investments, like precious metals and foreign currency.  

These accounts allow for more personalized investment strategies that align with your financial goals. Whether 401(k) accounts are provider-guided or self-directed, we assist our clients in making informed investment decisions that align with their defined goals.  

RETIREMENT PLAN TRENDS TO EXPECT 

Staying on top of the trends driving the retirement plan landscape is crucial to helping our clients navigate their options in an ever-changing market. Three key trends we are seeing or anticipating are outlined below: 

1. Auto–enrollment and escalation could boost participation and savings rates. Beginning in 2025, 401(k) plans must have auto-enrollment and auto-escalation provisions. Rather than asking employees to sign up themselves, automatically enrolling workers can increase participation rates and create more savers in the U.S. Additionally, by automatically increasing the percentage that each worker saves by a default percentage, retirement savings rates are likely to get a boost. This is beneficial even for ultra-high-net-worth clients who might overlook the advantages of 401(k) participation, helping them to increase their savings over time. 
2. More employees are using target-date funds to “set it and forget it.” An unprecedented $3.5 trillion is now held in target-date funds. These types of mutual or exchange-traded funds are a mix that can be described as a “fund of funds” and are designed to make it easy to invest in a single strategy based on your specific retirement date. The investment allocations inside such funds are adjusted and rebalanced automatically, becoming more conservative as your target retirement date approaches.  
3. Socially responsible investment options are expanding. As workers, particularly younger generations, become more focused on socially responsible investing, sponsors of workplace retirement plans are responding by offering more diverse fund options. This shift reflects a growing awareness that impact investing has potential to improve the world while delivering attractive financial outcomes, making it a popular choice for conscious investors looking to align their financial goals with their values. 

NAVIGATING YOUR FINANCIAL FUTURE TOGETHER 

Understanding trends, regulatory changes, and determining the best investment strategies for your retirement and other life goals can be challenging. Our Private Advisors are key resources in guiding clients through crucial planning and investing techniques. We aim to help our clients prepare not only for retirement but for the lives they wish to lead today and the legacies they want to leave for their families. We warmly invite you to speak with your Rockefeller Private Advisor or request an introduction.