Tips for Couples to Manage Their 401(k) Plans
Why experts advise sitting down together for the best results
You may have a 401(k) retirement plan at work and if you are married or have a partner, your one-and-only may have one, too. But have the two of you sat down to review the plans together and see if the combined investments make sense as a whole? Chances are, you haven’t. But financial experts think it’s really important to do so.
“Married investors can increase growth by having a united investment strategy that picks the best options from all available 401(k) accounts in order to build a superior combined strategy,” said Patrick Whalen, a Certified Financial Planner at Whalen Financial Planning in Los Angeles.
Think of yourselves as an economic unit. “Married couples, and even committed, unmarried partners, are financially intertwined” said Amy Barnes, CEO of Firebrand Wealth Management in Seattle. “No matter how separate they may keep their assets, savings strategies and investments, each of their financial lives, with rare exception, impacts the other.”
"The quality of mutual funds varies widely between 401(k) plans, and it is often necessary to cherry pick in order to create an overall strategy that isn't dragged down by mediocre funds."
Liz Gillette, a Certified Financial Planner at MainStreet Financial Planning in Washington, D.C., suggested “mentally consolidating the accounts.” To do so, she said, “look at fees and expense ratios for both plans (an expense ratio is what a mutual fund charges), look at investment options and identify their performance.” Ultimately, Gillette notes, a couple needs to “come up with a joint investment allocation that suits you both.”
Really study your retirement plan offerings together. “Every 401(k) plan is different, offering different investment options,” noted Barnes. “Couples can explore where they can lower costs among the investment products — such as looking at index funds instead of active mutual funds. And they can share their asset allocation with each other (how much money is in stocks versus bonds or other asset classes) to make sure they are growing their money sufficiently.”
Grab the best mutual fund offerings from both your 401(k) plans. “The quality of mutual funds varies widely between 401(k) plans, and it is often necessary to cherry-pick in order to create an overall strategy that isn't dragged down by mediocre funds,” said Whalen. “My first step for screening mutual funds is to look for the funds with the lowest expense ratios.” Whalen recommends looking for an expense ratio below 0.25%.
But what if one person in the couple has a 401(k) lacking a quality option in a major asset class, like international stocks? “That person should leave that asset class out of their plan, while the other person should overweight that asset,” said Gordon Achtermann, of Your Best Path Financial Planning in Fairfax, Va.
Be sure at least one of your 401(k)s includes a quality, low-cost bond fund. This will add diversification and help act as a buffer when the stock market heads south.
“It is common for 401(k) plans to be missing good options for bonds. If only one spouse has access to quality, low-cost bond funds, then you can increase the allocation to bonds for the spouse with good options and reduce the bond allocation for the spouse with bad options,” Whalen said.
Consider making use of a Roth 401(k) if you can. That’s a 401(k) funded with after-tax dollars; contributions in conventional 401(k)s are made with pre-tax dollars. With a Roth 401(k), your withdrawals in retirement will be tax-free.
“One spouse might have access to a Roth 401(k) plan, while the other may not,” Whalen said. “In order to be more diversified from a tax perspective, it can be advantageous for the spouse with access to a Roth 401(k) plan to contribute to it.”
Both of you should invest enough to get the company match, if you can afford to do that. That’s, in essence, free money that can bolster your retirement savings. “Both people in the couple need to be contributing enough to get the largest company match their employer offers,” said Achtermann.
Name each other a beneficiary for the other person’s retirement plan, if you haven’t already. That way you’ll not only ensure that the funds will go to your loved one if you predecease him or her, it’ll help you both think of your 401(k)s as linked.