As 2012 closed out, many people reviewed their 401(k) statements to determine how much they contributed for the year and the progress they made toward their retirement goals. If you did not perform the end-of-the-year evaluation, it’s not too late to put aside some time to review your retirement plan and determine if you should change the contribution amount.
Most employers allow participants to make changes to the contribution level at any time. Many experts recommend that employees consider raising their 401(k) plan contributions automatically at the same time they receive a raise in pay.
The following information can help guide your intentions to increase your 401(k) contributions this year:
Rising contribution levels in 2013
Even if you increase your contribution an additional $500 or so–it helps build your retirement nest egg. The seemingly small amount grows–with the wonders of compound interest– into much more when you’re ready to tap your retirement fund. In 2013, rules allow you to increase your maximum contribution limit. The automatic inflation adjustments push the new limits for participants in the 401(k) plan from $17,000 in 2012 to $17,500 in 2013.
Contributors age 50 and over can contribute more in accordance with the IRS’s “catch-up” rule, which allows you to save an additional $5,500. You can take advantage of this even if you won’t turn 50 until December 31, 2013. Employees who qualify can contribute a total of $22,500 to their 401(k) plan account in 2013.
How to increase contributions
All contributions to your 401(k) plan must come through payroll deduction—meaning you cannot add money to your account from outside sources. Depending on your plan, you can contribute a fixed dollar amount or a percentage of your paycheck.
The plan will likely limit your contribution to a percentage of your salary. Generally, it takes about two paychecks before a contribution adjustment appears on your paycheck.
If you cannot afford to make the maximum contribution to your retirement account, make it a point to at least contribute enough through payroll deduction to avail yourself of the company’s match. Some companies allow employee to contribute year-end bonuses. You will have to make this request well in advance of when the bonus check is paid.
Changes in fees
Beginning in 2013, new federal rules require program administrators to send program participants quarterly and annual 401(k) statements that itemized the fees charged to their retirement accounts. The statement must show the returns in comparison to a benchmark. Review these fees and determine if the funds in your account have reasonable or excessive fees in comparison with other funds.
Although the rules require funds to provide this new information about fees, you ultimately have the responsibility to look at your statement and understand the fees. If you need assistance, find out if your funds provide employee assistance and education.
Most programs have an independent advisor. The advisor’s covered service agreement with your company must clarify the services it provides, which should include employee education to help you understand and compare funds and fees.