As financial advisors, guiding clients to maximize their 401(k) plans is crucial for ensuring robust retirement outcomes. Recent legislative changes have introduced features that can be tailored to meet individual retirement goals. Here are five essential tools to consider:

1. Roth 401(k) Contributions

Roth 401(k) options allow clients to make after-tax contributions, with qualified withdrawals during retirement being tax-free. This feature is particularly beneficial for clients who anticipate being in a higher tax bracket in retirement. Advisors should assess clients’ current and projected tax situations to determine the suitability of Roth contributions.

2. Automatic Enrollment and Contribution Escalation

Automatic enrollment ensures employees start saving without requiring proactive enrollment actions, while automatic escalation gradually increases their contribution rates over time. These features can significantly enhance participation rates and savings accumulation. Advisors should work with plan sponsors to implement and optimize these features, ensuring they align with clients’ retirement objectives.

3. Target-Date Funds

Target-date funds automatically adjust the asset allocation mix as the client approaches retirement. They offer a hands-off investment strategy that aligns with the client’s expected retirement date. Advisors should evaluate the glide path and underlying assets of these funds to ensure they match the client’s risk tolerance and retirement timeline.

4. In-Plan Annuities

Some 401(k) plans now offer in-plan annuity options, providing clients with a predictable income stream during retirement. This feature addresses longevity risk by ensuring clients do not outlive their assets. Advisors should carefully analyze the terms, fees, and benefits of in-plan annuities to determine their appropriateness for clients’ retirement portfolios.

5. After-Tax Contributions and Mega Backdoor Roth Conversions

For clients aiming to maximize their retirement savings beyond traditional limits, after-tax contributions combined with mega backdoor Roth conversions can be advantageous. This strategy involves making after-tax contributions and subsequently converting them to Roth, allowing for additional tax-free growth. Advisors must ensure clients’ plans permit these contributions and conversions and should consider the tax implications involved.

By leveraging these features, financial advisors can tailor 401(k) plans to better suit clients’ unique retirement goals, enhancing their financial security in retirement.

Article Source:

AARP. (2024). 5 Ways to Tailor Your 401(k) Plan for Your Retirement.