It’s open enrollment season – here’s how to make the most of your benefit plan
- September 3, 2018
We all know what back to school means for parents of grade-school children — buying new supplies, adjusting schedules and making sure your kids are prepared for success. Fall is the perfect time for employees to take stock and make sure they are set up for success as well.
Each fall, many employers offer open enrollment for their benefit plans. And while a lot of employees just check the same boxes on the enrollment form each year, they often are not aware of all aspects of their benefit plan.
These days, companies provide a myriad of benefits that go beyond traditional savings. Advanced planning can help you take advantage of discounted services and savings vehicles that reduce taxable income or save you money outright.
Maxing out the employer-sponsored savings plan and making sure health-care benefits meet your and your family’s needs should be the priority. Here are a few of the other areas that you should review during open enrollment to make sure that you are taking full advantage of your benefits:
Ensure appropriate investment selection
A balanced, diversified 401(k) account is important to your financial wellness. Proper diversification helps manage investment risk. A well-diversified account should be long-term oriented. It is likely to contain bonds and stocks, as well as investments in different types of businesses. How much you invest in each of these categories should be based on your appetite for risk. If you are unsure how to construct a well-diversified account, take the time to review your plan’s fund menu and talk with your financial adviser.
Maximize the employer match
Employers today commonly match employee contributions up to a percentage of annual income. And while many employees have heard about matching programs, far fewer fully understand how these programs work.
A common match, for example, is 50 cents for every dollar employees save, up to 6 percent of their salaries. So, if an employee earning $60,000 saves 6 percent, or $3,600, towards a retirement plan, the employer would contribute $1,800. An employee saving only 3 percent would be missing out on half the matching amount.
If you’re unsure how much you need to save to take advantage of the match, talk with your HR department — and then aim to save that much towards your retirement plan. If you’re not taking advantage of the company match to the fullest, you are leaving free money on the table, and that’s a huge mistake.
Take advantage of tax-free accounts
Flex-spending accounts (FSAs) are tax-free accounts offered by some employers. Money saved in an FSA can go towards health or dependent-care spending but must be used by the end of the year. Otherwise, this money is forfeited.
If you are enrolled in a high-deductible health-care plan, then you may be eligible for a Health Savings Account (HSA). These accounts can be set up at the financial institution of your choice. Money goes into the account pre-tax, grows tax-free and, when used towards medical expenses, it is not taxed.
The main difference between HSAs and FSAs is that money saved in an HSA rolls over year to year. Because the balance rolls over, what you contribute to a Health Savings Account now can help pay for medical expenses in retirement. This makes it a very attractive long-term retirement savings vehicle.
Voluntary benefits meet diverse needs
Companies today offer a wide variety of voluntary benefits that are outside of the norm of health care, retirement savings, life insurance and disability. These expanded offerings tend to focus on improving quality of life – ranging from support towards college debt or pet insurance coverage. Review these options carefully so that you understand the full benefits available to you and if it’s worth it.
Don’t create a need for loans
Many employer benefits are important to take advantage of – but there are also elements that you may want to use sparingly. Some employer-sponsored retirement plans allow you to take a loan from retirement savings for almost any reason. The process is generally simple, but don’t be tempted to create a need for this money. The assumption should be that you truly need a loan. A college tuition bill is a legitimate reason to look into a 401(k) loan. Using the loan to fund a vacation — not so much. Borrowing from your 401(k) can have a very real negative effect on your retirement savings.
As soon as you receive information from your employer for open enrollment, or before, think about what your life will look like in the next few years. Open enrollment is an ideal time to review what is available to you and discuss how it fits into your overall financial plan with your financial adviser.
The decisions you make during open enrollment can lower your tax liability. By arranging for pretax or — better yet — tax-free deductions for certain expenses, you can reduce your taxable income.
David Mount is a director with The Wise Investor Group at Baird in Reston.