4/17/26 Retirement Planning 101: How to Maximize Your 401(k)

The Moneywise Radio Show and Podcast Friday, April 17th BE MONEYWISE. Moneywise Wealth Management I "The Moneywise Radio Show & Podcast" call: 661-847-1000 text in anytime: 661-396-1000 website: www. MoneywiseGuys.com facebook: Moneywise_Wealth_Management LinkedIn: Moneywise_Wealth_Management The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

• 0:00Speaker 00

  Live from the basement inside the historic Woolworths Building in downtown Bakersfield. Call or text in at 661-396-1000.

• 0:09Speaker 01

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• 0:29Speaker 02

  Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services offered through LPL Financial. LPL Financial and MoneyWise Wealth Management are independently owned and operated.

• 0:37Speaker 00

  Now, let's start the Money Wise Show.

• 0:40Speaker 03

  Hey, welcome to the Money Wise Show, live from the basement of the historic Woolworths Building in downtown Bakersfield. For the next hour, you're here on News Talk 96.1 and 1230 a.m., Kern, K-E-R-N, streaming live on the World Wide Web. The wonderful World Wide Web, is that the four W's?

• 1:03Speaker 04

  World, worldwide, what, no, three.

• 1:04Speaker 03

  Yeah, well, worldwide, that's two, right there, right? So the four. Yeah, you can call or text into the show anytime, 24 hours a day, 661-396-1000, 661-396-1000. Streaming live at MoneyWiseGuys.com in the interwebs. Hey, I'm your host, Justin Leland, here with?

• 1:22Speaker 04

  Frank the Tank.

• 1:23Speaker 03

  Frank the Tank.

• 1:24Speaker 04

  Frank the Tank. Frank the Tank. I think Chris was saying that he needed to take the name back. It was like, oh, you can try, buddy.

• 1:31Speaker 03

  No, you don't get, you don't get that anymore. Yes, unless your middle name is Frank, which it's not.

• 1:37Speaker 04

  Yeah.

• 1:38Speaker 03

  You don't get it.

• 1:38Speaker 04

  Yeah.

• 1:39Speaker 03

  So, if you'd like to listen to the show, or on any of our past shows, past programs, by all means, subscribe to the Money Wise Guys Podcast, commercial-free, on all of the major podcast platforms like iTunes, Apple Podcasts, or my favorite, Spotify. You can get in there and listen to those things without commercial breaks, which we all hate commercials, so, don't do that. We don't want to do that. But we're here to talk to you about, we got a great show. We're gonna, we're gonna do a Happy Friday Show.

• 2:14Speaker 03

  Wall to wall talking about 401ks and retirement savings for our listeners. So Frank is going to play the part of the participant in a plan, asking all the questions that you as a listener today should be asking.

• 2:29Speaker 04

  Yep, yep.

• 2:30Speaker 03

  And we're going to hit you with the real scoop on retirement savings and how your 401k should work. So this should be a really good, interactive conversation. And we really want to have folks reaching out, you know, again, 661-396-1000. We've got a few questions that popped in, we'll hit those here in just a quick moment, but we're going to do what we do best. It's a lot of green on the screen, Frank.

• 2:57Speaker 04

  Yeah.

• 2:58Speaker 03

  Frank the Tank, they knew Frank the Tank was going to be on the show today, so they opened up the Straits of Hormuz.

• 3:03Speaker 04

  Yeah.

• 3:04Speaker 03

  And here we are with the markets up in massive good territory. Thank you very much, Frank. It's all, it's all due to you.

• 3:12Speaker 04

  Of course, of course. My pleasure. Yeah, it's definitely greener on this side. Dow Jones is up about 180 basis.

• 3:22Speaker 03

  It's up like 900 points.

• 3:24Speaker 04

  900 points, almost 900 points. Yeah, we still have about an hour to the market, but still in green territory. S and P up about 109, Nasdaq 129, and the Russell 2K up almost 200. So a lot of green, a lot of.

• 3:42Speaker 03

  Lots of green on the screen. So all the folks that were, here's the thing, it's like, you know, when, when the, the Iran war kind of started, and I will use the term war. When that Iran war started in, in March.

• 3:59Speaker 03

  Markets really tanked, right? I mean, I wouldn't say tanked. They can, they, they wound up going into correction territory. They were, they were down 10%. Nasdaq was down about 12%. S and P did hit the 10% down and so did the Dow. So, you know, that's a correction in our, in our world. We look at that and it's like, okay, it happens probably once every 16, 18 months. You'll have a 10% correction in the market. We hadn't had one in a while. So it was time. Now, the, the war was the, the canary in the coal mine, if you will, that created that situation that allowed for that correction to happen, which is a healthy thing to happen in the market. We want to see a 10% correction, usually at least every two years, you know, once every 16, 18 months. That's on average when we see it.

• 4:44Speaker 03

  That's good. I know people are like, hey, why, what? Why would you say we want the market? No, it's a good thing that when we get a correction in the market because it's getting rid of the overvaluation. There are times when the markets are overvalued and we need to come back down to fundamentals. And this is a chance for us to be able to come back into a fundamental stage with the markets.

• 5:03Speaker 04

  Yeah.

• 5:04Speaker 03

  Now, markets go down 10 or 12% in very short order. And then all of a sudden, one Wednesday, the S and P 500 hit an all time record again.

• 5:15Speaker 04

  Yeah.

• 5:15Speaker 03

  Well, what does that tell you? And we weren't, this news hadn't come out yet. So, yeah, I mean, we, we came back at, you know, down 10%, 12% come roaring back in a few days. And now we're at, we're hitting record highs again.

• 5:33Speaker 04

  Yeah. I think this goes to show that you, you really can't time the market in this sense. And you can't anticipate those, those rallies or those dips and say, oh, okay, I think this is the, the right time to get in. Cause there are times where you might miss out on opportunities like this, right? And it's, it, it just goes to show that no one has a crystal ball. You know, it, it momentum comes in, in great momentum and

• 5:56Speaker 03

  Right.

• 5:57Speaker 04

  You, you're, you're, if you're timing the market, you're going to miss out on a lot of this momentum.

• 6:02Speaker 03

  Right. And so the, the issue of timing the market, let's, let's use this most recent example as a, as a, um, a hot take here. Let's, let's do this. So if you were the type of person who would, um,

• 6:19Speaker 03

  Take your 401k and as soon as the bombs started falling in Iran, you waited for a little bit and all of a sudden you see, hey, my portfolio is down 10%. And you sold everything because you were afraid that it was going to continue to go down. I know that there's people out there listening to me that probably did this, okay?

• 6:41Speaker 03

  The markets are down 10%, they sell. I can't lose anymore. I'm getting close to retirement. I'm a little worried. I'm gonna sell everything. They go into like a bond fund or a stable value or cash only, right? Well, what do they do? They locked in their losses. They stopped the bleeding, if you will, but now they're stuck in cash. And this is where, and there's statistics to show this. You can look at the last, you know, 20 years of stock market returns. If you sell because of the bad days in the market, like the freak out mode of like, hey, I'm selling because the market was down 3% last week, or whatever the case may be, right? Here's a stat for you.

• 7:26Speaker 03

  The S and P 500, the S and P 500, the average rate of return on the S and P 500 is 9.8% over the last 100 years. It's roughly 9 point, just under 10%.

• 7:41Speaker 03

  If you were completely invested in that for the last 2, you know, 4,000 days, it's the last like 20 years, right? 4,000 trading days. You would have returned basically a 9.8% rate of return, a 10% per year annualized rate of return. Okay, cool.

• 8:00Speaker 03

  If you just take out the worst, the best performing five days, meaning the days when the market was up 3.5 or 4% in a single day. You take out the top five days. From the previous two, you know, 4,000 days of the last 20 years of trading days. What do you think your rate of return is from that going from a 10%? What would you say Frank?

• 8:26Speaker 04

  Uh, probably what? 7%?

• 8:31Speaker 03

  It drops to about 6.8%. You lose about, you lose about three percentage points.

• 8:35Speaker 04

  Hey, I'm good at this.

• 8:36Speaker 03

  Right? If you take out the next five days and now you're only taking out 10 days of returns out of the last 4,000, the 10 best days. Your return basically is halved. You're not, you're no longer at nine, you know, 10%, you're about 5%. If you take out the top, the best 20 days, you actually have a negative return. You've lost money if you take out just 20 days. Now, the, the ancillary to this is when do the best days in the market happen? Days like today, which would be considered a day that is a very, very good day. If you missed those days, when do those days typically happen?

• 9:21Speaker 03

  Eight times out of 10? It's within three weeks of the worst days. So when you freak out and you sell at the bottom of the market because I can't lose anymore. Invariably, eight times out of 10, in the next three weeks, there is going to be a monster rebound and bounce from that low because there's people like me and Frank who are contrarian investors. And it was like, when everybody's running for the exits, I'm running for the door to get in. Right? There's a ton of investors are doing the exact same thing. When people are panicking, as Warren Buffett says. When people panic, be greedy. And when people are greedy, panic. Yeah, it's, that's, that's the ancillary kind of way of doing it.

• 10:06Speaker 03

  So again, staying invested over the long haul, the long haul, the long term breeds out much better results and you cannot time the market. You just cannot do it. Hey, we're going to take a quick break. We're going to get to some of the questions that popped in, but we're going to go deep dive on some 401k questions, your questions when we come back.

• 10:35Speaker 03

  Welcome back to the Money Wise Show.

• 10:40Speaker 03

  I'm your host, Justin Leland, here with Frank Lee. We're going to get down to business and talking a lot about 401Ks. So if you have questions, comments, concerns about 401Ks and how they work in your financial plans, stay tuned and definitely, you know, send in your questions because we're going to answer them. We answer them here live on the air. But yeah, we're going to get into it, but we had a couple of quick questions we wanted to hit real fast. What we got Frank?

• 11:08Speaker 04

  Yeah, so let's see here. First question we have, is the diner back open at night? One week, it's the next week and it isn't.

• 11:17Speaker 03

  Yeah, one week on, one week off. No, it's actually the hours at the luncheonette here at Woolworth's is Monday through Thursday from 11 a.m. to 3 p.m. So lunch hour and then Friday and Saturday, we're open from 11 a.m. to 8 p.m. Okay, so Fridays and Saturdays were open late. And then Sunday, I believe, and maybe I'll have to get back to you on Sunday, but I think Sundays were. Closed. Oh, they closed. I think they're closed on Sundays. Closed entirely on Sundays. There you go. All right, then the other one, what other question we have?

• 11:52Speaker 04

  Next one is if I already have a will, is setting up a living trust really worth it? Or is that more for people with a lot of assets?

• 11:59Speaker 03

  Ooh.

• 12:00Speaker 04

  Great question.

• 12:00Speaker 03

  I don't know if it's an asset based question. It can be, definitely can be an asset based question. A will is usually very, very good. Except for the fact it goes through probate and it becomes contestable. It's public knowledge, all of that. If you want to retain that privacy, then a trust is the best way to go. Because it doesn't go through probate. It doesn't become that kind of a thing.

• 12:27Speaker 03

  I personally believe if you have real estate, like you own your home and you have children, a trust makes sense.

• 12:35Speaker 04

  Yeah.

• 12:35Speaker 03

  Regardless.

• 12:36Speaker 04

  Yeah.

• 12:36Speaker 03

  I think that is, that's kind of my bar. If you have kids and you have a house. Pay the extra couple hundred dollars and get the trust done.

• 12:45Speaker 04

  Yeah, and we can provide some guidance for people who are looking into that. Basically, it's not just a living trust is where you have to have X amount of assets. It's like, no, no, it just depends on what you want to pass over and avoiding that probate.

• 13:00Speaker 03

  Correct.

• 13:00Speaker 04

  Wills, they have their certain needs for that.

• 13:04Speaker 03

  Yeah.

• 13:05Speaker 04

  But that's case by case.

• 13:07Speaker 03

  Yep. Sounds good. Okay, so now we're going to get into the 401K space. We have a question here already that I think is paramount for participants in a plan who maybe think that they're behind the eight ball. What do you got there, Frank?

• 13:24Speaker 04

  Yeah, we actually have two that just came in. So let's start off with the first one. If you're in your 50s and feel like your retirement savings aren't where they should be, what's the best move you should make right now, Valerie?

• 13:37Speaker 03

  Increase your savings. I mean, that's a blanket statement, too easy.

• 13:42Speaker 04

  Yeah, yeah, very blanket statement, but.

• 13:45Speaker 03

  So my take on that, Valerie, would be, you know, you're in your 50s. There's other questions I might have, like, hey, does your employer offer a retirement plan? Whether it's a 401K or a simple IRA or any number of different things.

• 14:04Speaker 03

  If they do, and you are not maximizing that opportunity,

• 14:12Speaker 03

  then work towards getting to the point where you're able to maximize that opportunity.

• 14:18Speaker 03

  And I'll use an example here. So let's say that your employer offers a 401K and the matching contribution calculation is, hey, you have to put in 6% of your pay in order to get this 4% match.

• 14:35Speaker 04

  Yep.

• 14:36Speaker 03

  But you're only putting in, say, 3% of your pay.

• 14:41Speaker 03

  Right? So you're not getting the full match. You're only getting maybe two or 3%, right? Right there is one of the easiest ways to increase your retirement savings and it doesn't take much to do it.

• 14:56Speaker 04

  No.

• 14:56Speaker 03

  Right?

• 14:59Speaker 03

  My, my recommendation for everybody, when somebody's willing to hand you free money in the form of a matching contribution, if somebody's offering, your, your boss is offering you free money, why are you not taking it? That's my, the biggest question I have is if somebody's gonna hand me free money, I say, "Thank you and continue on." Right? So that would be my first step. Now, if you're in your 50s, there's an additional piece. If you truly feel like, "Hey, I'm maxing out as, I'm putting in the minimum amount necessary to get the maximum match. I'm getting the matching contribution."

• 15:37Speaker 03

  But you still feel like your, your savings are behind. There is a caveat within the IRS code that allows for people that are over the age of 50 to contribute more. So the maximum amount of, so Frank's over here, he's a young whippersnapper. He is not old enough to do the catch-up contribution. So the maximum amount of money that he can put in to his 401k this year is 24,500.

• 16:06Speaker 03

  Now, I'm not such a young whippersnapper and I'm two years away from getting to the old, the ripe old age of 50. I still can only put in the 24,500, but if I were two years older, I can put in an additional $8,000.

• 16:23Speaker 04

  Catch-up contribution.

• 16:24Speaker 03

  Those are catch-up contributions. So now my number is no longer 24,500, it becomes 32,500 or 33,000. Okay? That closes the gap pretty quick. If you're able to do that. So that's the first thing I would do. If you're over the age of 50 and you feel like you're behind, take a look at your contribution levels. If you're not getting the full match, at least get there. If you are getting the full match and you still feel like you're behind, if you can eke out an extra two or three percentage points,

• 16:52Speaker 04

  Right.

• 16:53Speaker 03

  Please do that.

• 16:53Speaker 04

  Right. And just to address this quickly, as far as the fundamentals go, it's like, understanding exactly what your finances look like.

• 17:01Speaker 03

  Right.

• 17:01Speaker 04

  What is your income need? What is the, the sources that you have? Understanding that and then utilizing these type of vehicles at your, at your disposal.

• 17:10Speaker 03

  Absolutely.

• 17:10Speaker 04

  Yes. Starting, starting there is usually the best place to go. All right. Uh, next question. So I have a 401k that's around 150 to 175k and was thinking about pulling out 10 to 15,000 to put into a new home for my daughter and then pay it back in the next two to three years. Would that be smarter than getting a bank loan?

• 17:32Speaker 03

  Oh, man, this is a great question and I hope everybody really takes this to heart when I, when we answer this question.

• 17:42Speaker 03

  Frank, what is your first initial reaction to that?

• 17:45Speaker 04

  Initially, no.

• 17:47Speaker 03

  Yeah.

• 17:48Speaker 04

  Anything where you're, you have that much assets in the, in your 401k.

• 17:55Speaker 04

  Pulling out 10 to 15 is, is a big amount. In, in this example, it doesn't seem like it, but

• 18:02Speaker 03

  You're taking out 10% of your, of your portfolio.

• 18:04Speaker 04

  Right, right. And, and that goes a long way in the compounding effect. Granted, I don't know how old this participant is, but say you have another 10 to 15 years, that's another 10 to 15 years that the account can be compounding. And if you're taking out that much, you've set yourself back, not just a few years, but more, or those two to three years.

• 18:27Speaker 03

  It could be a decade.

• 18:28Speaker 04

  Right.

• 18:29Speaker 03

  Right. Now, I have a more nuanced answer to that question. It's still no. It's, it's still no. Don't, don't do it.

• 18:36Speaker 04

  Right.

• 18:37Speaker 03

  But the, the answer to that question is twofold. So most people will say, I'm taking a loan from the 401k and I'm paying myself back with interest.

• 18:50Speaker 03

  No, you are not. Okay. So. Let's say that you're taking out a loan from your 401k and they say, okay, well, the loan, the interest rate on that is going to be 6%. Let's just say, for instance, it's 6%. Okay, great. I'm going to pay myself back with 6% interest. Cool. That sounds like a great plan, right? That's where they get you. Because the money you've put in. Has been put in on a pre-tax basis. So Frank, let's say you're in the 24% tax bracket. Right? And just on a federal level, you know, 10, you know, the 24% tax bracket. You've been deferring your income. And saving that tax.

• 19:35Speaker 03

  You're getting that tax break. You just, uh, you're now paying that loan, you take the loan out and you're paying yourself 6% back. You are now paying that loan back with after-tax dollars.

• 19:46Speaker 04

  Yes. Keyword after-tax.

• 19:48Speaker 03

  After-tax. You put the money in pre-tax, you're now taking, you're paying it back with after-tax. That loan rate is no longer 6%, it's 30.

• 19:57Speaker 03

  I would rather take money out of my credit card than pay, than pay 30% from a 401k loan. That does not take into account the fact that that's $10,000 to $15,000 that's no longer compounding like Frank just said.

• 20:08Speaker 04

  Yes.

• 20:08Speaker 03

  You take both of those together, that loan could potentially be costing you 40%.

• 20:13Speaker 04

  Yep.

• 20:14Speaker 03

  Absolutely do not take the loan for that purpose. Go and get a signature loan. It's far cheaper and it does not hamper your retirement. We're going to take a quick break here. Um, you know, when we come back, more questions from your 401ks when we get back. What? You told me.

• 20:34Speaker 04

  Well, anyways, going, going back to that question. It's, it's definitely smarter to, to look at other alternatives than the 401k loan. Just because of that.

• 20:43Speaker 03

  Right. Now, if, if. Let's just, for instance, if it is a true hardship and there's no other way to get money, I'm not necessarily adverse to doing it because you absolutely have to and there's no other liquidity. What you need to also remember is you need to have an emergency fund as well. If you don't have an emergency fund, you, you need to get one immediately. And that way you're not having to delve into your 401k to help out your daughter with a down payment on a house.

• 21:14Speaker 04

  Yes, yes, exactly.

• 21:16Speaker 03

  That's, I mean, at the end of the day, fiscal responsibility is, is not just, hey, I have money in my 401k. It's, do I, do I carry debt well? Do I have, do I have credit card debt or do I pay that off immediately? Do I have an emergency savings plan or do I not? Right? So not necessarily against 401k loans in all cases, but you really have to be careful with them. We'll be right back.

• 22:01Speaker 03

  Welcome back.

• 22:08Speaker 03

  I do like to clash every once in a while. I'll throw that in there. Some British.

• 22:14Speaker 03

  Some folks from across the pond.

• 22:18Speaker 04

  Small pond.

• 22:19Speaker 03

  A little small pond called the Atlantic Ocean.

• 22:23Speaker 03

  Well, we're back. I'm your host, Justin Leland here with Frank Lee. We're talking 401ks, all things 401k. We had some great questions about loans and what to do if maybe you feel like you're behind the, the eight ball, behind the curve and needing to save more or, you know, increasing that, that number. We got another question that popped in over the break. But I, you know, Frank, did you want to reiterate anything on that loan discussion that we talked about earlier?

• 22:51Speaker 04

  No, I, I think we covered the, the high level topics there.

• 22:53Speaker 03

  Right. You just be careful.

• 22:55Speaker 04

  Yeah.

• 22:55Speaker 03

  Right?

• 22:55Speaker 04

  Yeah, yeah.

• 22:56Speaker 03

  If it's a true hardship, by all means, it's your money. You need to get to it, use it.

• 23:00Speaker 04

  Right.

• 23:01Speaker 03

  But loans, gotta be careful.

• 23:03Speaker 04

  Yeah. In general, not usually what we would advise.

• 23:06Speaker 03

  Yeah. Here's a real quick snip or a statement I like to use when dealing with 401ks is the more often you touch your 401k, it's like a bar of soap. Your 401k is like a bar of soap. The more you touch it, the more it disappears. So don't take loans out. Don't go in and change the construction of your 401k constantly. You know, the DIY kind of way of like, hey, I'm going to move from here to here and I'm going to time the market. Nope, you're actually going to lose money doing that. So the more you touch it, the more it disappears.

• 23:48Speaker 04

  Don't touch it.

• 23:48Speaker 03

  Don't touch it.

• 23:51Speaker 03

  Yep, yep.

• 23:52Speaker 04

  That's so funny because that's what, that's exactly what we're going through with you. It's like, don't touch it. No.

• 24:00Speaker 03

  Get your hand out of the fire. Okay, we got a question here. Let's go.

• 24:04Speaker 04

  Yeah, yeah, let's dive into this. Okay. Enjoying this, I didn't know about the early fees. Maybe when you guys have time, maybe talk about 401k rules when it comes to business owners. Thank you.

• 24:13Speaker 03

  Ooh, this is a really good one. So we manage 401ks for probably, gosh, 90 companies in town. 90 or so 401ks, give or take. And so we're really in tune with what's going on with ERISA and how it works for business owners.

• 24:31Speaker 03

  From a business owner standpoint,

• 24:36Speaker 03

  you know, obviously you have a responsibility to your participants, but you also want to make sure that the 401k is working for you as well. Okay. Now, here's the, here's the situation. If you are a business owner or what we consider a highly compensated employee, meaning anybody that's making, you know, a hundred and $150,000 or more, you're considered a highly compensated employee. Which then means

• 25:08Speaker 03

  there's certain testing that has to happen within your 401k to make sure that it stays compliant. Okay, the rules basically state that if you have a 401k.

• 25:18Speaker 03

  ERISA, which is the law that governs 401ks, basically says if you're a highly compensated employee or a business owner, you have to pass through these guardrails. And basically, it states if, if you contribute too much to the plan, you may wind up having to owe money to the rest of your employees to, to make up for the difference. Or you have to take money out of the plan is, is what is known as a corrective distribution. To make that, to make that whole. So anybody that's a business owner that's heard the term corrective distribution, you just shuddered a little bit. I know you did. Okay. Now, there's a way to deal with that and there's ways to do it by way of having what's known as a safe harbor 401k plan.

• 26:02Speaker 03

  I know a lot of people probably have heard that term. So what happens with a safe harbor plan is there are certain things that you have to give to your employees in terms of matching contributions and certain other, other things that are, that you have to give in order for you to not have to pass through those guardrails as stringently.

• 26:20Speaker 04

  Yes, yes. It comes with a slight cost, but it's beneficial.

• 26:25Speaker 03

  It's beneficial for the business owner. So now in that position, if you're a business owner and you want to put in the full $24,500 and not have to worry about those dastardly corrective distributions, now you can. But you have to give something to your employees in the form of, say, like a 4% match or, or something to, or removing vesting schedules and we'll get to vesting schedules here in a little bit.

• 26:47Speaker 04

  Yep.

• 26:49Speaker 03

  But now you're in a position where you can do more. And then as a business owner, um, you know, there's the non-elective contributions that can come in and, and you can get up to a higher number. You can basically get almost to about $70,000 in a 401k. If, if it is properly structured, right? So if you have any questions on that as a business owner, please give us a call. We can walk you through the, uh, how do you, the governance piece of how do you create a 401k that is going to benefit not only yourself as the business owner, but all of your employees as well? It's, it's, you gotta do both.

• 27:23Speaker 04

  Yeah. And, and real quickly to touch on the, the business owner aspect. I think one of the blind spots that these business owners miss is the fiduciary portion of the 401k plan.

• 27:35Speaker 03

  They have a responsibility.

• 27:36Speaker 04

  Yes, the business owner has that responsibility. So anything that comes about the 401k in terms of the investments, the funds, they are reliable. They are liable for those types of lineup, the planning and everything.

• 27:51Speaker 03

  Correct.

• 27:52Speaker 04

  So the risk falls on them.

• 27:53Speaker 03

  The risk falls on them and so they have to do their own due diligence to make sure that the plan is solid, right? You got the right advisors, you got the right record keeper, like where the plan is housed. Is it at Transamerica? Is it at Census? Is it Fideli? Wherever the case may be. And so you can offload a lot of that responsibility if you have the due diligence and answering the right questions and doing the right things for the employees. And so you don't wind up like one of the 155 ERISA lawsuits that were filed last year.

• 28:25Speaker 04

  Yeah, that was mind blowing.

• 28:28Speaker 03

  We'll get to that here in a little bit, too. There was 155 lawsuits, class action lawsuits.

• 28:34Speaker 04

  Against.

• 28:35Speaker 03

  Filed in 2025 against 401k plans predominantly.

• 28:39Speaker 04

  Yeah.

• 28:39Speaker 03

  For a number of different reasons. We'll get to that in the next segment.

• 28:42Speaker 04

  Right, right, right. So

• 28:46Speaker 04

  going down that that vein of 401k, some other questions that usually come up that I think would be prudent to answer is in that line of vesting. So what is typically vesting? What does it mean?

• 28:59Speaker 03

  Great question. So a lot of people ask me like, what is vesting? So if you're a participant in a plan and you're looking at your 401k and it says, let's say you have, we'll take this other example. I have between 150 and 175,000. Okay, so if this individual has $175,000 in their plan and it says account value 175, vested account value 165.

• 29:25Speaker 03

  Folks will see that. Now, what that means is that you have not worked for the company long enough to be able to keep 100% of the matching contributions that have come to you. Okay, you are always able to get the money that you have put in. And you will have a portion of the money that your employer puts in on your behalf as a match. Once you've made it past whatever their vesting schedule is, and the maximum amount is like six years, right? Most of them are between four and five years vesting. I have seen a couple where they're six-year vesting schedules. But essentially, you're, you know, 0% vested in that matching contribution and maybe in that first or second year.

• 30:10Speaker 03

  Because the employer is saying, hey, we want this person to stick around.

• 30:14Speaker 04

  Yep.

• 30:14Speaker 03

  Right? We're going to give you this money and it's going to be invested for you. But if you were to leave the company within that first two years, we get to claw back the match.

• 30:22Speaker 04

  Yep.

• 30:24Speaker 03

  Right? Because you left it too early. Now, if you've made it past three or four or five years, you might have a portion of it, say 20 or 40 or 60 or 80% would be vested to you. And then, once you've made it past the full, hey, you have to be with the company for five years before you're fully vested.

• 30:40Speaker 04

  Yep.

• 30:41Speaker 03

  That's what that means. And so, once you've hit that that gate, you've made it past five years and you're 100% vested. If you were to leave the company, you can take the entire matching contribution with you and it's not forfeited.

• 30:54Speaker 04

  Yep. Yep. That's that's vesting. And something that we can really talk about in in relations to vesting is the difference between a traditional 401k and a safe harbor 401k. You you touched on that briefly.

• 31:07Speaker 03

  Right.

• 31:07Speaker 04

  A second ago. And this sort of ties into the vesting portion.

• 31:11Speaker 03

  Right. So, in a traditional 401k, you may have a vesting schedule like that. Right? It's it. You can't. You you have it where it's like it's a three-year cliff or four-year, five-year, six-year, whatever the whatever the vesting schedule is. And so, that's why you might see, hey, I have 175,000. Why does it tell me that my vested amount is only 165? That tells you right there that you have a traditional 401k plan. It is not a safe harbor. And the business owner has certain tests that have to be met for a risk of standpoint to be in compliance and they may have corrective distributions and such like that. A safe harbor plan, however, on the other hand, one of the things that the business owner agrees

• 31:53Speaker 03

  to when setting up a safe harbor 401k plan is that there's no vesting schedule on matching contributions. If it's a matching contribution that is 100% vested to your employee, the minute that those funds go in there.

• 32:06Speaker 04

  Yep.

• 32:07Speaker 03

  Okay. Now, that plan that has a safe harbor 401k does not necessarily mean that all funds that are provided by the employer are 100% vested to you. It's only the match. If the company decides that they want to offer a quote unquote profit share, that can have a vesting schedule on it, separate from the match. So I know it's getting nuanced and weird, but for most, for most people, if you have a safe harbor 401k plan, there's no vesting schedule on the match. You're 100% vested immediately. Right? So that's the way that we, we break those down.

• 32:46Speaker 03

  But as, as far as business owners are concerned, if, if you, if you have less than 100 employees, the chances of you being in a position where you probably want to look at a safe harbor plan versus a traditional, it's, it's pretty high because the, the, the, the testing that has to be done, the larger your company is, the easier it is to pass those tests.

• 33:10Speaker 04

  Right.

• 33:11Speaker 03

  Right? You know, if you have 20 or 30 employees, the chances of you having a, an outsized number of maybe highly compensated folks versus owners, the percentages don't work. And so it, it basically forces you into a situation of, well, I'm only able to put in X amount of dollars and I can't max out my 401k because I don't pass these tests or I have to take these corrective distributions. So that becomes a, a hurdle for folks.

• 33:38Speaker 04

  Right. Cause you, you don't want to just, just. Cherry pick and compensate the highly compensated employees. You want to be able to offer something that is beneficial for everyone, even the rank and file.

• 33:51Speaker 03

  And that's the rules that are in ERISA. It's basically the 401k plan cannot be generated and created for the sole purpose of enriching the owners of the company.

• 34:02Speaker 04

  Right.

• 34:02Speaker 03

  There's something has to go to the employees. And so that's why ERISA was created. We are going to take a quick break. We're going to come into the final segment of the show. More about your 401k when we come back. Stay tuned.

• 34:24Speaker 03

  Welcome back. A little gin and juice for you. It's perfect segue into the weekend.

• 34:31Speaker 04

  I like gin and juice.

• 34:35Speaker 03

  D O double G.

• 34:39Speaker 03

  Nice. Welcome back to the Money Wise Show. We're last segment before we go into the weekend. We got another question that popped in here. Another great question. Kind of going back to what we had talked about a little bit earlier, but kind of want to reiterate. Question says, you say people shouldn't touch their 401ks, but real life happens. Amen. Real life happens. If someone faces a serious emergency, what are their other options? Great question. Frank, what's your first take on that?

• 35:08Speaker 04

  Again, if it's an emergency and there's no other options, then obviously 401k loan is an option for you to tap into.

• 35:17Speaker 03

  Or a hardship that IRS allows for certain hardship withdrawals to happen.

• 35:21Speaker 04

  Yes.

• 35:22Speaker 03

  Yes. Yeah, that's. We're not saying that don't ever touch your 401k. That's absolutely, we know that life happens.

• 35:30Speaker 04

  Right.

• 35:31Speaker 03

  But under normal circumstances, you definitely do not want it. You're not using it to buy a car.

• 35:36Speaker 04

  Yeah, exactly.

• 35:37Speaker 03

  You don't want to take a car, you don't want to take a loan out to pay a car and pay a 40% you know, effective rate on that, on that loan.

• 35:45Speaker 04

  I think in this sense, what constitutes an emergency?

• 35:48Speaker 03

  Right.

• 35:49Speaker 04

  I think that's a big key, key word there. If you if you're just doing this to get a loan out of your 401k because you think you're paying yourself back, that's not an emergency.

• 35:58Speaker 03

  That's not an emergency.

• 35:59Speaker 04

  If you're trying to get something to where you're, you know, having to pay medical bills, or yes, your your car does break down, you don't have an emergency fund, the the rate on it, uh, on the the loan that you get is higher than maybe, but it's again, it whatever constitutes an emergency, I think that's what we need to.

• 36:18Speaker 03

  Well, let's let's also dispel one thing here that one of the reasons for a for for a hardship withdrawal is, let's say that you're real close to to having to file bankruptcy. Now, I've heard this before where people are like, hey, I need a hardship withdrawal because I'm otherwise I'm gonna have to file bankruptcy. My answer to you is file bankruptcy, leave the money in the 401k, and here's a reason why.

• 36:45Speaker 03

  Typically, under normal circumstances, your 401k is not reachable by your creditors.

• 36:54Speaker 03

  Meaning if you go and file for bankruptcy, you should be able to continue to maintain your 401k without having to touch it. They can't touch it. They can't touch your retirement plan. So why would I take money out of my 401k to avert a bankruptcy, which I'm probably gonna wind up having to file anyways?

• 37:15Speaker 03

  It doesn't make sense from a fiscal standpoint. Another one is, hey, if my house is gonna be foreclosed on, yeah, that's an absolute definite emergency. If you're gonna have your house foreclosed upon and you need to take out $10,000 in a hardship withdrawal to to avert a foreclosure,

• 37:33Speaker 03

  please do. Please do. But understand the ramifications of doing that.

• 37:40Speaker 03

  Life happens by all means. Use the money if you absolutely, absolutely have to, but talk to an advisor first. I would highly recommend at least that process. If you need to talk to an advisor, you know, give it, give us a call.

• 37:52Speaker 04

  Yep.

• 37:52Speaker 03

  Give us a call. Now, in 2025,

• 37:59Speaker 03

  Over a hundred, it was 155 ERISA fiduciary lawsuits filed against 401ks and other retirement plans by attorneys. Now,

• 38:15Speaker 03

  here's the caveat to that.

• 38:18Speaker 03

  Most 401ks will wind up settling, right? They wind up, there's obviously maybe some kind of an issue that was brought up by the lawsuit. It's usually a class action lawsuit. It's usually attorneys that are, you know, basically farming large 401ks for some disgruntled employees that are like, hey, there's this, this fund in here is not working right, or it's, it's under, you know, underperforming or whatever. We're going to file a lawsuit. So they file a lawsuit and the 401k provider or the business itself settles those lawsuits. And guess who's, guess who gets paid?

• 39:01Speaker 03

  I'm gonna just wild guess, who gets paid?

• 39:04Speaker 04

  The attorneys.

• 39:05Speaker 03

  Bingo. Do you think any of that settlement money actually winds up going to the actual participants that were effectively wronged by the issue that was brought up by the attorneys? Very, very modest, very low payouts to participants from these class action lawsuits. I'm sure maybe somebody listening has been like, oh, I had a, I had, you know, 50 bucks put back in my 401k.

• 39:33Speaker 03

  Well, who got far more than the 50 bucks was the attorney that filed the lawsuit. So these ERISA complaints range from things like excessive fees. Right? That is a thing, you know, excessive fees can be, you know, something that can be a drag on people's, you know, 401ks as far as the, the performance. It can be a headwind. And that's a legitimate concern.

• 40:03Speaker 03

  Another large percentage of them were because of imprudent investments. Okay, now that's a broad brush. And it may be because plan, you know, certain funds are underperforming. I have seen a lot of lawsuits like Bloomberg was sued, their 401k was sued. Southwest is going through a lawsuit right now for improper Boeing. Yeah, there was, there's where the 401k itself had underperforming funds. And did nothing about them for well over a decade.

• 40:34Speaker 04

  Yeah.

• 40:35Speaker 03

  Now, you can always have a fund that underperforms its benchmarks in any quarter or any year. But if you continue to have that fund in there year after year after year after year, and you don't make any changes and it continually winds up being at the bottom of its Morningstar ratings. That's where you open yourself up for lawsuits.

• 40:55Speaker 04

  Yep.

• 40:56Speaker 03

  And so that's what's happened with some of these. And, and that's rightfully so Boeing, Southwest. If you didn't make changes and these plans, these, these funds have been in there for, you know, 15 years. Expect to get sued.

• 41:08Speaker 04

  Yeah.

• 41:09Speaker 03

  Expect it.

• 41:09Speaker 04

  Yeah, yeah.

• 41:10Speaker 03

  Right? Now, go ahead.

• 41:11Speaker 04

  Oh, so, so big takeaway in this is like, I, I know we're talking about lawsuits and these big companies and everything like that with plans that are north of a hundred million or so.

• 41:23Speaker 04

  Now, some of the small business owners are thinking like, oh, maybe that doesn't apply to me. Well, think again, it's, it, it still does apply to you in a sense of if you are the fiduciary, you have to make sure that you are up to date on these investment funds. And I, I think that's where we need to step in and say, hey, have you addressed this? Are you really staying up to date?

• 41:45Speaker 03

  Yeah, staying up to eight, to date as a business owner, but additionally, you've got a business to run.

• 41:50Speaker 04

  Yeah.

• 41:51Speaker 03

  Right? If you, if you're a, if you're a small business owner and you're running a business, you're running a, a plumbing, you know, store or something like.

• 41:58Speaker 03

  Are you a 401k expert?

• 42:01Speaker 03

  Should you be?

• 42:04Speaker 03

  That's, so this is where the advisor comes in. And this is why I say like, if you have an advisor that's helping you with your plan.

• 42:11Speaker 04

  Yep.

• 42:13Speaker 03

  Fantastic. You know, what is that advisor doing though, to make sure that the plan is staying up to date with the fiduciary responsibilities?

• 42:22Speaker 04

  Exactly where I was getting at is that are you making sure that they're staying up to date?

• 42:26Speaker 03

  Right.

• 42:26Speaker 04

  In the sense of.

• 42:27Speaker 03

  You're putting their feet to the fire.

• 42:28Speaker 04

  Yeah, yeah, yeah. So if you are working with an advisor, maybe take a second look at that sheet and be like, hey, like, I noticed some of these funds aren't performing well, they've been here.

• 42:37Speaker 03

  Is there a reason why this is still in here?

• 42:38Speaker 04

  Yeah, exactly.

• 42:39Speaker 03

  What have you done recently?

• 42:40Speaker 04

  Exactly.

• 42:41Speaker 03

  Yeah, so that's my biggest concern with that from a fiduciary standpoint for the business owner is you have to make sure that you're keeping the trusted advisors that you have around you. You have to keep their feet to the fire and keep them accountable.

• 42:54Speaker 04

  Oh, yeah, 100%.

• 42:55Speaker 03

  Because otherwise you can run into these. Now, the lawsuits that are happening from ERISA, for these ERISA lawsuits, these lawsuits have happened.

• 43:04Speaker 03

  Predominantly, the attorneys are looking at plans that are north of $250 million. I think in Kern County, there's one plan of that size. One. So I'm not too worried about like, you know, attorneys coming down market and suing a bunch of small business owners about fiduciary, like, they're going where the money is because they know that they can get paid. That's why the settlements are there. That's why they're getting paid. And the participants are not necessarily being benefited.

• 43:33Speaker 04

  Yeah.

• 43:34Speaker 03

  By that happening.

• 43:35Speaker 04

  Yep.

• 43:36Speaker 03

  So, you know, don't worry too much about it, but definitely you still want to make sure you're keeping the plans.

• 43:42Speaker 04

  Yeah.

• 43:42Speaker 03

  Accountable and the people accountable.

• 43:45Speaker 04

  It's what we can learn from this and pass on to those small business owners.

• 43:49Speaker 03

  Absolutely, absolutely. So, hey, Frank, thank you very much for all of the questions. Thank you to all of the listeners for the questions. Have a wonderful weekend. It looks like it's going to be beautiful outside. Be smart, be safe, be money wise, and we will see you on Monday.

• 44:06Speaker 02

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