This error can go unchecked for years, and it might even send you back to the drawing board to draft a new retirement plan.
A 401(k) is the go-to retirement account for most people who qualify for them, for many good reasons. They enable you to set aside large sums, you might qualify for an employer match, and they can be pretty convenient.
Once you’ve set up your 401(k) contributions, the money automatically comes out of your paychecks unless you decide not to contribute anymore. Or at least that’s how things are supposed to work. In practice, there’s an alarming issue that, when recognized, leaves many workers scrambling to make up for lost time. Here’s what you need to know so you can avoid it.
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Are you actually saving for your future?
Being eligible for a 401(k) and actually contributing to one aren’t the same thing. Some companies may auto-enroll employees and defer a predetermined percentage of each paycheck to their 401(k), unless the employee elects to stop this. But many employers put the onus on employees to decide how much they’d like to contribute and what they want to invest in.
This can create confusion among workers, especially those who aren’t familiar with how 401(k)s work. Roughly 3 in 5 workers who aren’t contributing to their 401(k) believe they are, according to a recent Principal survey. And it’s not just young workers making this mistake. A whopping 64% of the workers who erroneously thought they were contributing to their 401(k) were from Generation X — those born between 1965 and 1980.
It might be as simple as a miscommunication where the employee believes the company has an auto-enrollment policy when it doesn’t. Or it could be that the employee thought they’d already enrolled when they filled out their employment paperwork. Whatever the reason, the result is the same.
These workers aren’t deferring any of their paychecks to their 401(k)s, and they’re missing out on the opportunity to grow their savings for the future. When they do realize their error, they’ll have to set aside even more money from each paycheck to retire when they originally planned.
How do you know if you’re contributing to your 401(k)?
Checking your pay stubs is one of the fastest ways to determine if you’re actually contributing to your 401(k) plan. If you had money deferred to your retirement account, it should show up there. If you don’t see any 401(k) deferrals listed, that’s a sign you might not be contributing.
You could also contact your company’s HR department to verify your participation. Someone there should be able to help you determine if you’re contributing and how much you’re setting aside each month.
They should also be able to help you adjust your contribution rate if you’d like to change it. You may be able to do this yourself if you have access to an online portal where you can view your 401(k) balance and manage your investments and deferral rate.
If you realize you weren’t actually contributing to your 401(k), you’ll have to make some financial adjustments. First, you’ll have to prepare for smaller paychecks than you’re used to. Be careful not to defer so much that you’re unable to pay your monthly bills. You can technically get your money back from your 401(k) if you have to, but you’ll pay a 10% early withdrawal penalty if you’re under age 59 1/2.
Second, you’ll have to revisit your retirement plan. You might need to save a larger percentage of your income than you’d planned to, or else you might have to put off retirement for a while longer until you’ve saved enough to cover all your costs. It’s not an ideal situation, but swift action can minimize the damage. Consider all your options before deciding on your best path forward.