The arrival of a new year is a natural time to pause and take stock of how you’re doing in all facets of life. Particularly this year, when it’s a little harder to step into (or back into) the gym, it may be an opportune time to take a few minutes to check in on the fitness of your 401k.

Too often, making decisions about your 401k can seem as daunting or uncertain as stepping onto a treadmill for the first time (so many buttons!). But it only takes a little basic information to start making meaningful improvements. And, unlike the treadmill, you can actually make forward progress instead of spinning in place.

Like our treadmill, there are some fundamental ”settings” you need to get right. There are also aspects specific to you and your plan with 3M to consider. Let’s take a look at what you need to get right in order to make the most of your 3M 401k.

The Basics:

1. The maximum amount you can contribute from your own salary deferrals will remain the same in 2021 as it was in 2020 at $19,500.
    
2. How much you contribute to your 401k will depend upon your ability to save and your goals. At a minimum we recommend that you contribute enough to take advantage of the company’s match (detail on those amounts is highlighted below). If you’re not able to contribute the maximum amount, that’s ok! It can be helpful to set up automatic, gradual increases to your contribution amount each year until you get to this point.
    
3. If you are over age 50, you can contribute an additional “catch-up” amount of $6,500. This amount is also the same in 2021 as it was in 2020. So, if you are lucky enough to be over age 50, you can contribute up to $26,000 total of your salary to your 401k.
    
4. You can contribute to your plan in the form of either “pre-tax” or “Roth” contributions. Pre-tax contributions mean you pay tax at distribution. Roth contributions mean you pay tax now. Sorry, you can’t completely avoid taxes by contributing to your 401k, but you can decide the most advantageous time for you to pay them. The decision between pre-tax and Roth contributions comes down to this - do you expect your tax rate to be higher now or in retirement?
   • If you are early in your career and haven’t yet experienced significant income increases, you may want to consider Roth 401k contributions and pay the tax now when your income is lower.
   • If you are at the point where your earnings have risen more substantially, paying the tax at distribution during retirement (when your income is potentially lower) may save you taxes.
5. When it comes to investing the funds in your plan, you’ll want to be sure your investments match your needs and goals. It’s important to select investments that you’ll be able to stick with through various market conditions. One of the countless lessons that 2020 has reinforced for many investors is the difficulty in trying to predict or “time” investment markets.

The Specifics:

Unfortunately, your 3M 401k doesn’t allow you to contribute more dollars than the IRS allows, guarantee outstanding investment returns, or match 100% of your contributions dollar for dollar. No plans actually do any of these. But, your 3M 401k does have some features worth noting that, when properly known and implemented, can help put you on a better path to getting your 401k investing right.

1. If you’re not quite ready to contribute the maximum amount, the 3M 401k does allow you to automate annual increases to your contribution rate. Countless academic studies conclude that financial outcomes are improved the more we automate decisions. If you start with just enough to collect the entire match (more on that below), you can elect to have your contributions automatically increase by 1% of your eligible compensation* per year. One catch on this feature, though, is that it stops at 10%. So, if you reach a 10% contribution and haven’t quite maxed out at $19,500 (or whatever the future limit is), you’ll need to manually intervene.
    
2. If you are a new employee and forget to enroll in your 401k, 3M will automatically enroll you at a 7% contribution rate. Automating enrollment is another area where your 3M 401k plan aligns with leading academic research on financial security.
    
3. The 3M matching contributions are based on the 3M “Portfolio” you are a member of, which is based on your hire date.
   • If you were hired after 1/1/2009, you are in Portfolio 3. You are eligible to receive a match of 100% of the first 5% of eligible compensation you contribute. 3M will also contribute an additional 3% to your account in addition to the matching contribution. This extra contribution is an added benefit since Portfolio 3 is not eligible to participate in the 3M pension.
   • If you were hired between 1/1/2001 and 12/31/2008, you are in Portfolio 2. You are eligible to receive a match of 60% of the first 5% of your contributions. So, if you contribute 5% of your eligible pay to your plan, your match will be 3% (5% * 60%).
   • If you were hired before 1/1/2001, you are likely in Portfolio 1**. You are eligible to receive a match of 45% of the first 5% of your contributions. If you contribute 5% of your eligible pay to your plan, your match will be 2.25% (5% * 45%).
4. If you’re age 50 or older, be sure to read this section. The age-50 catch-up contribution is a separate election for which you enter a dollar amount rather than a percentage of your pay. This is important because the allowable catch-up contribution amount increases over time and since it is a dollar-based election, it won’t automatically “float” a little higher as your compensation increases. Instead, it needs to be manually increased when the allowable amount increases. For example, in 2020 the catch-up contribution limit was increased from $6,000 to $6,500. This meant that you needed to manually increase your catch-up contribution from $500 per month to $541.67 per month.
    
5. Your 3M 401k offers attractive investment options for you based on how involved you want to be with your investments. If it seems like there aren’t a lot of choices, this is also by design. Again, the plan is aligned with leading research concluding that too many options make it more difficult to decide how to invest. That said, the choices that are available all represent low-cost, broadly diversified index funds – these are all good attributes!
   • If you prefer the most “set it and forget it” approach, you might consider the LifePath Portfolios. These are broadly diversified funds that include both stocks and bonds that will gradually shift to an increasingly lower stock allocation as your approximate retirement date approaches. Drawbacks to these funds are that they may not integrate well with the rest of your investment portfolio, and when you do need to take withdrawals, they do not allow you to specify the stocks or bonds to sell.
   • If you prefer a little more control or flexibility of your investment choices, you can select the funds available that represent specific categories of investments, or asset classes. These funds include the S&P 500 Stock Index Fund, Small and Mid Cap Stock Index Fund, International Stock Index Fund and others.
   • The most flexible option is the Personal Choice Retirement Account (PCRA), which is a separate account administered through Charles Schwab. A full description of this account is beyond the scope of this note, but it provides an opportunity to integrate your 401k investments with other investments you may have in a more thoroughly diversified portfolio.
     

     It should be noted that this option may be best utilized with professional management as there is no automatic rebalancing feature, which could cause your investments to deviate from your intended objectives over time.

If you nail “The Basics” and optimize “The Specifics” of your 3M 401k, you’re on a good path.

Please reach out with any questions about integrating your 401k, or any of your other 3M benefits, with your total financial plan. We’re happy to help!