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Breaking Down Retirement Plan Jargon

Introducing Retirement Plan Jargon Sampler: What Is a 401k?

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If you haven’t picked up our Retirement Mixtape collection, it can be yours for two easy installments of … free. They’re full of hits from the blooom team, perfect for setting the mood in dreaming about the day you decide to retire:

We pulled together the collections because we at blooom LOVE music and a good mixtape.

The idea occurred to us that we should continue the music metaphor to help break down retirement plan jargon. So … welcome to our inaugural retirement plan jargon post. We’ll spin a few of these each month to help translate the relatively unintelligible world of investing, specifically 401k management.

For our first track ….

What Song Explains What a 401k, 403b or 457 Is (AKA … an Employer-Sponsored Retirement Plan)?

This required some work on my part.

“The price is what? Life makes echoes … If you see them.”—“Echoes” by The Rapture

Simple song with simple lyrics that I knew from the movie “Superbad.” Though a 401k account (along with the other account types) is complicated in its naming, employer-sponsored retirement accounts are simple in concept:

You invest a portion of your paycheck before taxes are taken out to help fund your retirement (after-tax options may exist, as well, so check to make sure you’re getting the option you want). In many cases your employer match the money up to a certain percentage (i.e. they give you free money). And taxes usually aren’t paid until the money is withdrawn.

So, it’s a benefit your employer provides and they can give me some free money on top of what I put in? And the pre-tax investments can grow without having pay taxes until I started taking it out in retirement?

Yes. And Yes. It’s too bad this song also works as a metaphor for the accounts intended design, but they struggle in practice. Let me explain:

“The city breathing. The people churning. The conversating. The price is what? The conversating. This place is heaven … Come together.”

Unfortunately, people aren’t “coming together” at the rate to pay for their retirement. According to the U.S. Census Bureau, only 41% of… employees who can contribute, do. (1.)

So What Exactly Are These 401ks, 403bs and 457s? They Sound Like 4th Generation Teslas?

“The city breathing. The people churning. The conversating. The price is what?”

Some of us in the office wish 4th generation Teslas do exist. There certainly is a lot of buzz about the all-electric car, and we have some choice electric-only parking right next to our office entrance.

The 4-series we’re talking about aren’t cars with solar panels, instead they’re retirement savings plans offered by employers in different sectors, e.g. private or public, such as schools and government. The numbered naming (401k, 403b, etc.) comes from sections of the Internal Revenue Service’s tax code.

Still, the car and the plans are a bit alike.

While the current generation Tesla has you looking at the sticker and negatively saying … “The price is what?”, the upcoming generations are intended to make the electric automaker affordable to the masses. Employer-sponsored retirement accounts were designed to help average Americans accumulate enough wealth to retire.

The plans let workers save and invest a portion of their paycheck before taxes are taken out. In most cases, taxes then aren’t paid until money is withdrawn from the account.

And with many of these plans, you control how your money is invested. That is important because that’s where blooom comes in. We help invest your account in a combination of stocks and bonds that best aligns with your retirement goals.

What? You’re Not Going to Say Anything More about the 4-Series?

Nope. Not really. Other than hitting repeat on the song that not enough people take advantage of them.

So your employer offers a retirement plan … do you invest in it?

If the answer is no, consider what you’re missing. If you decide to participate in your employer sponsored retirement plan:

  • Your taxable income could be lowered
  • Your earnings compound and grow tax-deferred
  • It’s your personal account (that means it’s portable)
  • Many investment choices (that we’ll happily manage for you)
  • Likely matching dollars (free money?) from your company will be added to your account
  • It’s easy to enroll.

I’ve spent more than 13 years helping educate people about the importance of managing their finances (with a nearly seven-year hiatus working in communications and media).

Early in my career working with employers to educate employees about the benefits of their retirement plan, some employees would not participate because they didn’t trust or held spite for their employer. Unfortunately, the person this hurts the most … is you, the employee.

If you’re employer offers a plan, you should try to participate and contribute up to the match or, as our CEO likes to call it, the 120% rate of return.

If you’re compelled right this instant to learn more about 401ks, 403bs, 457s and other employer sponsored retirement plans, check out a site named Investopedia (helpful, but it definitely won’t be breaking this stuff down into song):

Otherwise, come visit us next week to see what track we use to explain a Default Investment Option.

I’ll give you a hint about the artist: Our logo is a flower, so we’re generally fans of bees. And she’s the queen!

1. Two-Thirds of Americans Aren’t Putting Money in Their 401(k) Bloomberg. Feb. 21, 2017  https://www.bloomberg.com/news/articles/2017-02-21/two-thirds-of-americans-aren-t-putting-money-in-their-401-k

Published on May 16, 2017