As we head into the last quarter of the year, it seems like a great time to take a look at your overall financial plan and make sure you are headed in the right direction. These days, a large part of many of our portfolios is a 401(k) plan. And while these are great as a “set it and forget it” solution, it’s important to understand how they work and make sure to monitor yours from time to time. Let’s take a look…

The Revenue Act of 1978 included a provision in which employees would not be taxed on income that they chose to take as deferred compensation. It also allowed salary reductions as a source of plan contributions. Thus was born the 401(k) plan. 401(k) plans are considered defined contribution plans because you choose how much you are putting into them every year. This is in contrast to defined benefit plans, or pensions, where different factors (such as years of service and your salary) determine how much you will receive at retirement. 401(k) plans have almost completely replaced pension plans as the employee retirement program of choice. This is because pension plans can be costly for the employer to meet its obligations as people live longer and their outflows start to overtake their inflows. (There are a few large cities and states that will be facing this reality shortly)

401(k) plans are employer sponsored retirement programs. That means that they are set up by companies to help their employees save for retirement. In order for you to participate in a 401(k) plan your company has to offer one. Here are some common characteristics of 401(k) plans:

  1. Traditional Deferrals – This means that you do not pay taxes on the money you choose to put into your 401(k) plan. When you pull the money out, it will be fully taxable as income.*
  2. Roth Deferrals – This means that you do pay taxes on the money you choose to put into your 401(k) plan, but when you take the money out, it will be tax free.*
  3. Company Match – Many, if not most, companies offer some sort of matching program. This means that the company will deposit money into your 401(k) account according to their matching rules. For instance, a company might have a 3% match, in which they will contribute $1 for every $1 you defer up to 3% of your income. Free money = not bad.
  4. 401(k) Loans – Most company plans will allow you to take a loan from your 401(k) account. On the plus side, the interest you pay, you pay back to yourself. On the minus side, the money you take as a loan comes out of your account as is therefore not invested.
  5. Portability – While you are employed by the 401(k) sponsor, you generally have to keep your account in the plan. However, when you leave the firm, whether through retirement or just changing jobs, you can move your account either to a new 401(k) (if your new plan allows for that) or to an IRA account.

And here are some simple strategies to make sure your 401(k) is healthy and happy:

  1. Make sure you are contributing at least what the company is matching. This seems simple, but I can tell you it is not. More people than you think are leaving money on the table by not getting the full company match. And, this should be the minimum.
  2. Make sure you are invested. Again, this is not as apparent as it seems. I have spoken to people who chose their deferral, but not their allocation and because their plan defaulted to a money market account, they were not investing.
  3. Make sure you are invested appropriately. Whether it is through speaking to your financial advisor, or filling out an asset allocation questionnaire, find out what the best portfolio mix is for you. Then make sure your 401(k) plan reflects this.
  4. Rebalance your account. This is an easy and often automated way to a) keep your allocation correct and b) buy low and sell high. Rebalancing just means that the program will automatically reset your funds to the allocation you originally chose. For example, if you had 80% in stocks and 20% in bonds and bonds outperformed stocks, you might end up with 78% stocks and 22% bonds at rebalancing time. In this case the program would sell bonds and buys stocks to get you back to 80%/20% mix. And while this may not seem that important on a daily or monthly basis, if you let it go for many years, your portfolio could become very out of alignment.
  5. Start out with as high a contribution as possible. In my experience, people are much less likely to increase their contribution level than to decrease it. Truth be told, most people will leave it once they first set it (hence the “set it and forget it”). So, if you’re going to forget it, make it a higher number rather than a lower one.

And finally, if you haven’t already, start saving today! Trust me when I say that you will not miss your 401(k) contribution as much as you think. (Please see my February 2015 blog, “Anyone can save”). People’s actual pay is less important than the amount that is deposited into their checking account. Whatever that number is, you are likely to spend most, if not all, of it. So, start with a little smaller deposit. You’ll still spend it all, but you’ll have put some away for later.

*Certain rules apply. Please consult your tax professional.

Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.


Gavin Chinn, CUSO Financial Services Advisor at Verity

Check the background of this investment professional on FINRA’s BrokerCheck.

A Financial Advisor registered through CUSO Financial Services, L.P., Gavin has 25 years of experience as an advisor in the Puget Sound area.

“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship, I can really get a sense of what’s going to work best for them.”

Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.

So what is Gavin’s vision for his dream retirement?

“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”

When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football and taking weekend trips around the Northwest.

Gavin is registered to transact securities business in the states of AZ, CA, CO, FL, HI, ID, IL, KS, MN, NV, NY, OR, UT, VA and WA.

*Non-deposit investment products and services are offered through CUSO Financial Services, LP (“CUSO Financial”) (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CUSO Financial. Verity Credit Union has contracted with CUSO Financial to make non-deposit investment products and services available to credit union members. Atria Wealth Solutions, Inc. (“Atria”) is not a broker-dealer or Registered Investment Advisor and does not provide advice. CUSO Financial is a subsidiary of Atria.

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