Employer plans and what to check in yours

A workplace retirement plan is likely to be the largest financial asset most people accumulate, and it is generally set up in ten minutes during onboarding and never revisited.

The match

The first thing to establish, and the highest-return item in the entire plan.

Employer matching contributions are, in effect, an immediate return on the money contributed. No investment available elsewhere offers anything comparable.

What to check: the formula, the maximum, and whether it is calculated per pay period or annually.

That last detail matters. Under some per-period formulas, contributing heavily early in the year and hitting the annual limit before December results in missing matches in later periods.

Some plans include a true-up provision that corrects this at year end. Many do not, and it is worth knowing which.

Vesting

Your own contributions are always yours. Employer contributions may be subject to a vesting schedule.

Schedules commonly run over a period of years, either gradually or as a single cliff after a defined period.

This is worth knowing before changing jobs, because leaving shortly before a vesting date can forfeit a substantial sum. Where a move is discretionary, the timing is worth checking against the schedule.

Fees

The item with the largest long-term effect and the least visibility.

There are generally two layers: the plan's administrative costs, and the expense ratios of the individual funds.

The difference between a fund charging a few basis points and one charging one per cent, compounded across a working life, is substantial — frequently amounting to a significant fraction of the final balance.

Plan disclosures are required and are generally not read. It is worth finding the document that lists expense ratios for each available fund and identifying the cheapest broad-market options.

In many plans, an index fund tracking a broad market index is available at a small fraction of the cost of the actively managed alternatives on the same menu.

The default investment

Most plans default new participants into a target date fund selected by expected retirement year.

These are a reasonable default and they are not identical to each other. Two funds with the same target year from different providers can hold substantially different equity allocations.

Worth checking: what the fund actually holds now, what its trajectory is, and what it costs.

The glide path also differs on a fundamental point — whether the fund is designed to reach its most conservative allocation at the target date or some years afterwards. This affects the risk you carry at retirement.

The contribution rate

Automatic enrolment has increased participation substantially, and it typically defaults people into a low rate.

That default rate is generally set for enrolment purposes rather than adequacy, and someone who accepts it and never increases it is likely to be undersaved.

Automatic escalation, where available, increases the rate each year and is one of the more effective mechanisms in retirement plan design, because it requires no ongoing decision.

Other features worth knowing about

Roth option. Many plans now offer one, and many participants are unaware.

After-tax contributions beyond the standard limit, available in some plans, which combined with in-plan conversion can allow substantially larger annual amounts.

This is a valuable feature where available and it is genuinely complex — worth professional advice rather than improvisation.

Loan provisions. Worth understanding before you need them, including what happens if you leave the employer with a loan outstanding.

The brokerage window, offered by some plans, which allows investment outside the fund menu. Useful for some, and not necessary for most.

When you leave

The decision points are: leave it in the old plan, roll it into a new employer's plan, or roll it into an individual account.

Each has trade-offs involving cost, investment choice, creditor protection and administrative simplicity, and these vary by plan and by state.

What is worth avoiding is cashing it out, which triggers tax and generally a penalty, and which is a common decision at job changes with a substantial long-term cost.

General information only, not financial or tax advice. Plan rules vary and change — consult your plan documents and a qualified adviser about your own situation.