Consolidating 401(k) With both partners in the relationship working, should you both contribute to your 401(k) or should you consolidate your investment into one? BY RICHARD MANCHESTER
Your 401(k)s may be on two different tracks, but maybe you should change to one.
My company does not offer a good 401(k) plan, but my husband’s is excellent. Can I use my would-be 401(k) money for other spending needs and have my husband save for both of us?
Your question is very relevant and one I hear often from clients. I’m always surprised by the variance in 401(k) plans from company to company. Before I answer your question, I want to first identify what makes a "bad" 401(k) plan.
Typically, there are three red flags. First on the bad list is a plan that does not match your investment contributions or matches very low. The match has two components to review—the percentage of the match itself and the percentage of your pay rate to which they match.
For example, a great match would be 100 percent on a maximum 10 percent of salary. Thus, if your salary was $50,000 a year and you elected to defer 10 percent into your 401(k) plan, you would defer $5,000 and your company would match $5,000.
Conversely, a poor match might be 25 percent on 3 percent of salary, which would equal $375, given a $50,000 salary and 10 percent deferred into the plan.
The second red flag is limited investment choices. A good plan will have 20 to 30-plus offerings, covering the gamut of asset classes including multiple choices of index and actively managed funds, growth and value styles, large-cap and small-cap stocks and several international choices. A poor plan will provide just seven to 12 choices.
The last thing to look out for in a bad plan is high fees. You’re going to have to do some research to uncover all the fees. Mutual fund choices come with an internal management fee and expense ratios. Look for these fees to be under 1 percent unless justified by consistently above-average performance. Does your employer pay the plan costs or are they passed on to participants?
So, that brings us back to the question—should you and your husband use only one plan?
If your combined deferrals can equal your match on your husband’s plan so you are not passing up your employer’s "free" match, then, by all means, make life easier and only contribute to one plan.
Alternatively, you may also contribute to your plan to the extent of your salary match and apply the excess to your husband’s plan. Be careful to make sure you are not losing a savings opportunity, as each of you can defer up to $15,000. The caveat is that this will work so long as both of your deferrals don’t exceed $15,000.
Remember, weight your options and invest in the better plan. It may even be yours.
Richard Manchester, JD and CFS, is CEO of Wave Wealth Management of Laguna Beach, CA.