401-k and 403-b Retirement Plans

The Time to Change Allocations

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By Clifton McIntire; CIMA, CFP®

By Lisa McIntire; CIMA, CFP®fp-book1 

401k and 403b plans offer great opportunity to change asset allocations.   

For example, Karen Markland, a Certified Registered Nurse Anesthetist at Carolina’s Medical Center, found it was relatively easy to shift from bonds to stocks some years ago. No taxes or commissions were involved. A simple phone call moved her allocation from 40 percent bonds, 50 percent stocks and 10 percent international to 20 percent bonds, 70 percent stocks and 10 percent international after a recent stock market decline. 

One point of caution when using 401k or 403-b plans for asset allocation is required. Quite often the trustees of 401k plans will decide on a single group of mutual funds for the participants. Not all funds in the group are worthy of your money.

Jean Surber, a Certified Registered Nurse Anesthetist at Presbyterian Hospital, did not have a good international option and so had to limit her allocation in that 401k plan to stocks, bonds and cash. She used her Individual Retirement Account (IRA) at a brokerage firm for international investing.

Employed healthcare professionals should “max out” on their 401k/403b plans. You should put all that you are allowed into your 401k/403b plan, unless the selection of managers is so bad that even with the tremendous tax break and “dollar cost averaging” of monthly contributions, the envisioned end results would be small.  

For example, the simple compounding of $10,000 at age 30 investing $416 per month and experiencing a 10 percent annual rate of return would provide $1,905,788 at age 65. 

Wake-Up Call 

The Federal Government annually mails a detailed explanation of social security benefits to its workers.  This is an attempt to remind people that social security fulfills only part of their retirement income needs. To many, this will be a wake up call. The status of 401k or 403b plans is normally sent to participants’ quarterly. This is an excellent time to do some asset allocation and review manager performance.  Since most 401ks and 403bs use mutual funds and/or ETFs, and offer daily valuations by telephone, you don’t have to wait for the quarterly report, which is often received 60 days after the end of the quarter. When changes are made in the allocation of existing positions, the percentage allocation of future contributions should be made as well. 

For example, when Karen Markland repositioned her 401k portfolio, she also changed her future contribution percentages. 

Information Sources 

Morningstar, a Chicago based company that analyzes and computes statistics on most of the mutual funds produces a monthly report that you can review at the library, or online at home.Most banks and brokerage firms subscribe to this service. They can send you an up to date single page analysis of each of your funds; or an internet syndication feed. This is good material, well researched, but it is historical data.“Past performance is no assurance of future results.” 

The Morningstar system rates funds from 1 star (worst) to 5 stars (best).  This is sometimes referred to as the Sesame Street method of selecting mutual funds.  If you can count to 5, you can pick the best fund. Using this report alone is like driving on an Interstate highway at 80 miles per hour using only the rear view mirror (that can be fatal). 

Why; it’s because fund portfolio managers’ change. Good managers are hired away by their competitors; bad managers are fired. Managers themselves are not always consistent in maintaining their style or in their performance. Morningstar and the Internet is a good place to start because you can review a lot of information at a single setting. You can see historical returns, sector weightings, manager tenure, investment style, costs (except trading commission expense) and statistics concerning risk. However, Morningstar’s independence has been questioned of late. Nevertheless, it is from these and many similar sources that you may learn of the performance you can reasonably expect. 

Few physician managers, but many financial advisors are well versed in a variety of mutual funds. Representatives of the funds call on them frequently.  Many brokerage firms perform independent due diligence research. Mutual funds are a large part of the Financial Services Industry and you can expect the availability of extensive information. 

Stay the Course 

Most 401k and 403b plans should be invested for growth of capital. You are generally talking about long-term investment objectives.You should be very reluctant to withdraw funds from this tax-sheltered environment.  Unfortunately far too often, the participant becomes discouraged, (usually in a down market cycle) and moves the money out of stocks and into a money market fund at the wrong time. 

It is not unusual to see doctor participants assume a very defensive posture a year or so before retirement. This is shortsighted. The investments are meant to provide income and growth of capital for many years, not just until retirement. Upon retirement the funds will be rolled out directly into an IRA and invested with almost the same asset allocation. 


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14 Responses

  1. I heard a funny joke:

    Question: What starts with ‘F’ and ends with a ‘K,’ and means Screw the Workers?

    Answer: 401-K



  2. ‘Father of 401k’ disowns it

    Lisa and Clif – Ted Benna, who three decades ago seized on an IRS loophole to transform American retirement savings, says he’s proud to be “father of the 401k.” But, he also now thinks he created a monster.




  3. 401-k and IRA withdrawals rules

    Withdrawals from traditional 401k and IRA accounts are taxed as ordinary income and can be subject to a 10% penalty if you’re under age 59½. With a 401k, one way you can avoid that 10% penalty is if you turn 55 or older the year you leave the company. If you qualify for that exception, you may not want to roll your 401k into an IRA for that reason until you reach 59½. (Will your 401k provide enough for retirement?

    Even if you don’t need to take withdrawals, you’ll be required to take minimum distributions each year starting when you turn 70½. The amounts are based on your life expectancy and are fully taxable. This is just the government’s way of making sure it gets its cut.

    With Roth accounts, the withdrawals are not considered taxable income as long as you’re over 59½ and the account has been open for at least five years. Even if you don’t meet those qualifications, you can still withdraw the sum of your contributions at any time and for any reason without tax or penalty.

    In either case, Roth withdrawals make the most sense in a year when your income tax bracket is higher than normal (such as when you’re working). Otherwise, it’s best to delay them as long as possible and let those tax-free earnings accumulate.



  4. Underfunded 401 (k)s Threaten Retirement Dreams

    Clif and Lisa, according to Dennis McCafferty, today’s workers [even doctors?] are struggling to pay their day-to-day expenses, so it’s no surprise even fewer are successfully squirreling away money for the future.

    And, recent research from Deloitte Consulting LLP., shows that most 401(k) planning professionals say employees aren’t planning ahead and adequately preparing themselves financially for their golden years.


    Any thoughts?



  5. 9 in 10 Americans Underestimate Their Hidden 401(k) Fees

    April is National Financial Literacy Month


    But, do you know what’s hiding in your retirement nest egg?



  6. Borrowing from 401-k or 403-b

    Clif – Borrowing is a bad thing to do.

    First, the money you borrow will no longer be compounding with interest. If this sounds like no biggie, consider that an MD borrowing $50,000 at age 35 and paying it back 4 years later will reduce his/her nest egg by $325,000, assuming historical returns, at retirement.

    Second, because you repay your loan with after-tax dollars and pay taxes when you withdraw that cash at retirement, you’re taxed twice on the same money.


    Dr. David Edward Marcinko MBA CMP®



  7. 4 Big Changes to 401(k)s, IRAs in Obama’s 2014 Budget

    The president’s budget blueprint proposes a number of reforms that would mean big changes in how retirement is financed.




  8. Slash 401(k) Fees To Aid Workers

    Charles Schwab CEO Walter Bettinger just called for a transformation of the 401(k) industry by slashing fees ……


    … and boosting advice.




    The shape of 401(k) plans to come – and why they’re changing.




  10. Why your health insurance may soon resemble your 401(k)

    What we’re talking about here is a shift in workplace health insurance akin to the dramatic shift in recent decades from traditional pensions to 401(k)s.


    Health insurance will move in the same direction in the next five years, according to experts at the annual policy forum sponsored by the Employee Benefit Research Institute (EBRI).



  11. What Is a 403(b) Plan?

    A 403(b) plan is a special tax-deferred retirement savings plan that is often referred to as a tax-sheltered annuity, a tax-deferred annuity, or a 403(b) annuity for employed doctors, healthcare professionals, and some others.

    It is similar to a 401(k), but only the healthcare systems, and some employees of public school systems and 501(c)(3) organizations are eligible to participate in 403(b) plans.

    Employees can fund their accounts with pre-tax contributions, and employers can also make contributions to employee accounts. Employer contributions can be fixed or discretionary. Eligible employees may elect to defer up to 100% of their salaries, as long as the amount does not exceed $17,500 (in 2014). A special “catch-up” contribution provision enables those who are 50 and older to save an additional $5,500. Total combined employer and employee contributions cannot exceed $52,000 (in 2014). Contribution limits are indexed annually for inflation.

    Employees have the option of choosing the types of investments utilized in their funds. A 403(b) can be an annuity contract, a custodial account, or a retirement income account. It is a good idea to do a little research before selecting how you would like to invest your funds.

    Distributions from 403(b) plans are taxed as ordinary income. Withdrawals made before age 59½ may be subject to a 10% federal income tax penalty unless a qualifying event occurs, such as death or disability.

    Generally, once you reach age 70½, you must begin taking annual required minimum distributions. You can receive regular periodic distributions on a schedule that is calculated based on your life expectancy, or you can collect your entire investment as a lump sum.



  12. Ted Benna Created a Monster

    A monster because of the high fees Wall Street gets away with. In fact, according to a study called “The Hidden & Excessive Costs of 401(k),” the typical American household will pay roughly $155,000 in broker fees over their lifetime.

    Any thoughts?



  13. LIMITS 2021
    The maximum 401(k) contribution is $19,500 in 2021 and $20,500 for 2022 ($26,000 in 2021 and $27,000 in 2022 for those age 50 or older).


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