By Peter Mastrantuono
An employer-sponsored retirement plan, like a 401(k), is the primary retirement savings vehicle for 39% of Americans in a relationship. Yet, nearly one in four say that their partner does not know how much they are contributing to their retirement, while almost as many say their partner has no idea how much they have saved.
Talking Dreams, Not Money
Most couples talk about their dreams for the future—what they want to accomplish and how they picture retirement. Unfortunately, it appears that they do not really communicate about how they can best achieve their financial goals together.
One of the causalities of this silence is that their 401(k) plans are not fully maximized because partners fail to coordinate the savings and investments decisions they make for each respective plan. Instead, they operate independent of one another, missing out on opportunities to leverage the best that each plan has to offer.
Opportunities to Coordinate 401(k) Decisions
Contributions are the first and most important decision that ought to be coordinated. Whatever the 401(k) savings level a couple can afford, they should make sure that their contributions are structured to fully benefit from a company matching contribution.
For example, suppose a young couple can afford to contribute only 6% of their earnings to a 401(k) and one employer offers a match on the first 7.5% of an employer’s contribution, while the other employer offers a 3% match. In such a case, it’s best if both contribute 3% of earnings to each plan so as to receive the savings boost of an employer matching contribution.
Another potentially fruitful area for coordination is with fees and investments. All other things being equal, higher fees will be a drag on long-term wealth accumulation. Consequently, the costs associated with each plan’s 401(k) investments need to be considered, with a bias toward making a greater share of contributions to the lower cost 401(k)—after satisfying the contribution required to receive the employer match.
That said, fees should never be the tail that wags the investment dog. One partner’s 401(k) may not offer a robust range of competitive investment options, in which case it may make sense to tilt a higher proportion of contributions toward the 401(k) with the stronger investment choices.
Another consideration is the type of 401(k) offered—Roth or traditional. There is a case to be made to diversify contributions into both types of plans, so if one partner’s employer offers both, while the other offers only the traditional, it may make sense for one partner to contribute to a Roth 401(k), while the other contributes to a traditional 401(k).
Of course, there is always the danger of a divorce or dissolution of a partnership to consider. 401(k) maximization strategies may leave one partner with lower savings. In the case of married couples this is less of a danger since community property states would consider these assets to be owned 50/50, while in other states retirement balances are a part of the overall negotiation of the financial terms of the divorce.
Balancing the levers of these 401(k) differences is not an easy task, but effectively doing so may result in larger accumulations to fund retirement. A financial advisor can assist couples in making these difficult decisions. Scheduling a sit-down with a financial advisor may turn out to be the most consequential step couples take in maximizing their 401(k)s and realizing their retirement dreams.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.