Many people have realized that they can not just retire on Social Security, especially if they plan on retiring from their jobs a little early. Because of this, you may be looking at your retirement savings and asking yourself, “Why is my 401k not growing?”
Having a robust 401k plan can help you be ready and prepared for retirement well in advance, and if your balance is not growing the way you want it to, then it is vital to get to the root of the issue earlier rather than later.
What is a 401k Plan?
A 401k plan is a plan offered by employers. It has several tax advantages for the employee. Typically used as a retirement savings plan, it allows a portion of an individual’s paycheck to be put directly into a savings account. The employer then matches up to a certain percentage.
Why is My 401k Not Growing: Four Possible Reasons
Your 401k is not growing, which can be related to your investments and other internal and external factors.
Your Investments aren’t Aggressive Enough
If you are wondering, “Why is my 401k not growing?” there may be an easy answer. If your investments are considered more risk-averse and on the safe side, then you may be limiting how much and how quickly your 401k can grow over time.
Many 401ks invest in the plan’s default option, which is a target date fund. A target date fund is a type of fund built to maximize the investor’s return by a specific date – which, for a 401k, is usually their retirement date. These are convenient in that they can be set up and left alone. However, they are usually more conservative, so they may not grow as quickly as you want.
The Stock Market is Down
If you are trying to get your 401k rolling, investing in a broad-market index fund might be better. Also called a broad-based index or just a market index, this is a type of fund that reflects the movement of the stock market. It is naturally riskier, but with that higher risk comes a greater reward – the possibility of better long-term savings.
However, this comes with its own set of issues. If you have a broad market index fund, then your 401k may have reached a plateau because of the market. As the stock market changes, your 401k is also subject to change – both for the good and bad.
You’re Not Utilizing the Full Employer Matching Offers
An advantage that 401ks have over IRAs is that the companies often match employer contributions up to a certain point. However, if you submit under that amount, you are essentially giving up free money and hurting your 401k’s overall growth.
For example, if you are $1,000 under your employer match this year, it may not seem like a big deal. However, if you are just around 30 years from retirement and your 401k offers an 8% annual return – which is lower than most annual returns- then you are missing out on an extra $10,000 when you finally retire.
This math shows that even if you can not max out your 401k yearly, you should try to complete the employer-matching amount.
Fees are Affecting Your Account
Different 401k providers can charge very different fees for offering administration services and investments, which may be the answer to your questions about why your 401k is not growing.
401k fees can be a big issue for employers and individuals.
Employers have a legal responsibility, which is called a fiduciary responsibility, to protect the interests of plan participants, and individuals can lose out big time when excessive fees cause their 401k to stagnate.
Dealing with fees is one of the reasons why it is so essential to establish a 401k plan with a trusted provider like CanalHR. For thirty years, we have been helping small businesses establish traditional 401k plans and a Roth 401k variation, a popular variation. We handle day-to-day taste and administration for small businesses, including compliance testing, record keeping, and reporting.
How to Make the Most of Your 401k
If you’re wondering, “Why is my 401k not growing?” you may also be asking yourself how you can maximize your 401k. There are a few ways to make the most of your investment now so you can enjoy it later.
Update Your Default Savings Rate
Most new employees are automatically signed up for a base rate between 3% and 5% of their paycheck. However, more than this may be needed to maintain the lifestyle they plan for during retirement. To make the most out of your 401k, consider adding 1% more with each pay raise so that you can eventually build up your fund faster.
Don’t Cash Out
When you change companies, you must decide what to do with your new 401k balance. While it’s tempting to withdraw and spend it, those under 60 will be subject to a 10% early withdrawal penalty and pay income on the tax amount withdrawn. Instead, consider creating a more significant nest egg for retirement and build up compound interest.
Feeless Rollover
If you change jobs, you can leave your balance at the company or roll it over. If you roll over, ask your former employer to transfer it directly rather than send you a check. This is another way to avoid burdensome fees that cut into your savings.
Why is My 401k Not Growing: Learn More with Canal HR
A PEO like Canal HR allows business owners to stay focused on their business. Canal HR is full of reliable and experienced HR professionals committed to ensuring your company’s 401k plan is what you want.
We are there every step of the way to support you as you ensure your employees have the treatment plans they deserve. To learn more, schedule a free consultation with one of your experts today!
