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Q: What Is 401k Auto Escalation?

An auto escalation is a 401(k) feature that automatically increases your contribution at regular intervals by a set amount until a preset maximum is achieved.

Apr

2024

What Is 401(k) Auto Escalation?

By Austin Kilham | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

One way to ensure you’re steadily working toward your retirement goals is to automate as much of the process as possible. Some employers streamline the retirement savings process for their employees with automatic enrollment, signing you up for a retirement plan unless you choose to opt out.

There are many ways to automate a 401(k) experience at every step of the way. You can have contributions taken directly from your paycheck before they ever hit your bank account and invest them right away. With automatic deductions, you’re more likely to save for your future rather than spending on immediate needs.

In some cases, you may also be able to automatically increase the amount you save. Some employers also offer a 401(k) auto escalation option that could increase your retirement savings amount as you get older. Here’s a closer look at how 401(k) auto escalation works and how it may help you on your way to your retirement goals.

401(k) Recap

A 401(k) is a defined contribution plan offered through your employer. It allows employees to contribute some of their wages directly from their paycheck. Contributions are made with pre-tax money, which may reduce taxable income in the year they are made, providing an immediate tax benefit.

In 2024, employees can contribute up to $23,000 a year to their 401(k), up from $22,500 in 2023. Those aged 50 and older can contribute an extra $7,500, bringing their potential contribution total to $30,500 in 2024 and $30,000 in 2023.

For many individuals, the goal is to eventually max out a 401(k) up to the contribution limit. Employers may offer matching funds to help encourage employees to save. Individuals should aim to contribute at least enough to meet their employer’s match, in order to get that “free money” from their employer to invest in their future.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

How 401(k) Auto Escalation Works

An auto escalation is a 401(k) feature that automatically increases your contribution at regular intervals by a set amount until a preset maximum is achieved. The SECURE Act, signed into law in 2019, allows auto escalation programs to raise contributions up to 15%. Before then, the cap on default contributions was 10% for auto escalation programs.

For example, you may choose to set your auto escalation rate to raise your contributions by 1% each year. Once you hit that 15% ceiling, auto escalation will cease. However, you can still choose to increase the amount you are saving on your own beyond that point.

Advantages of 401(k) Auto Escalation

When it comes to auto escalation programs, there are important factors to consider — for employees as well as for employers who sponsor the 401(k) plan.

Advantages for Employees

• Auto escalation is one more way to automate savings for retirement, so that it is always prioritized.

• Auto escalation may increase the amount employees save for retirement more than they would on their own.

• Employees don’t have to remember to make or increase contributions themselves until they reach the auto escalation cap.

• Increasing tax-deferred contributions may help reduce an employee’s tax burden.

Advantages for Sponsors

Employers who offer auto escalation may find it helps with both employee quality and retention as well as with reducing taxes.

• Auto escalation provides a benefit that may help attract top talent.

• It helps put employees on track to automatically save, which may increase retention and contribute to their sense of financial well-being.

• It reduces employer payroll taxes, because escalated funds are contributed pre-tax by employees.

• It may generate tax credits or deductions for employers. For example, matching contributions may be tax deductible.

• As assets under management increase, 401(k) companies may offer lower administration fees or even the ability to offer additional services to participants.

Disadvantages of 401(k) Auto Escalation

While there are undoubtedly benefits to 401(k) auto escalation, there are also some potential downsides to consider.

Disadvantages for Employees

Even on autopilot, it can be important to review contributions so as to avoid these disadvantages.

• Auto escalation may lull employees into a false sense of security. Even if they’re increasing their savings each year, if their default rate was too low to begin with, they may not be saving enough to meet their retirement goals.

• If an employee experiences a pay freeze or hasn’t received a raise in a number of years, auto escalation will mean 401(k) contributions represent an increasingly larger proportion of take-home pay.

Disadvantages for Sponsors

Employers may want to consider these potential downsides before offering 401(k) auto escalation.

• Auto escalation requires proper administrative oversight to ensure that each employee’s escalation amounts are correct — and it may be time-consuming and costly to fix mistakes.

• This option may increase the need to communicate with 401(k) record keepers.

• Auto escalation may cause employer contribution amounts to rise.

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Is 401(k) Auto Escalation Right for You?

If your employer offers auto escalation, first determine your goals for retirement. Consider whether or not your current savings rate will help you achieve those goals and whether escalation could increase the likelihood that you will.

Also decide whether you can afford to increase your contributions. Perhaps your default rate is already set high enough that you are maxing out your retirement savings budget. In this case, auto escalation might land you in a financial bind.

However, if you have room in your budget, or you expect your income to grow each year, auto escalation may help ensure that your retirement savings continue to grow as well.

If your employer does not offer auto escalation, or you choose to opt out, consider using pay raises as an opportunity to change your 401(k) contributions yourself.

The Takeaway

A 401(k) is one of many tools available to help you save for retirement — and auto escalation can help you increase your contributions regularly without any additional thought or effort on your part.

If you’ve maxed out your 401(k) or you’re looking for a retirement account with more flexible options, you might want to consider a traditional or Roth IRA. Both types of IRA offer tax-advantaged retirement savings, and in 2024, individuals can contribute $7,000 per year across IRA accounts, with an extra $1,000 catch-up contribution available to those aged 50 and older. In 2023, individuals can contribute $6,500 per year across IRA accounts, with an extra $1,000 catch-up contribution available to those aged 50 and older.

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FAQ

Is 401(k) auto enrollment legal?

Yes, automatic enrollment allows employers to automatically deduct 401(k) contributions from an employee’s paycheck unless they have expressly communicated that they wish to opt out of the retirement plan.

What is automatic deferral increase?

Automatic deferral increase is essentially the same as auto escalation. It automatically increases the amount that you are saving by a set amount at regular intervals.

Can a company move your 401(k) without your permission?

Your 401(k) can be moved without your permission by a former employer if the 401(k) has a balance of $5,000 or less.

Photo credit: iStock/Halfpoint

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Apr

2024

Top 5 401(k) Alternatives: Saving for Retirement Without a 401(k)

By Pam O’Brien | Growing Wealth, invest, Investing | Comments Off

A 401(k) is a popular way to save for retirement. But not everyone has access to these employer-sponsored 401(k) savings plans. For instance, many small companies don’t offer them. And self-employed individuals don’t have access to regular 401(k)s.

For those who don’t have access to a 401(k) at work or want to consider other retirement savings options, there are a number of 401(k) alternatives. Read on to learn about how to save for retirement without a 401(k), some 401(k) alternatives, and what you need to know about each of them to choose a plan that aligns with your retirement savings goals.

5 Alternatives to a 401(k)

These are some popular retirement savings plans available beyond a regular 401(k).

Traditional IRA

A traditional IRA (Individual Retirement Account) is similar to a 401(k) in that contributions aren’t included in an individual’s taxable annual income. Instead, they are deferred and taxed later when the money is withdrawn at age 59 ½ or later.

Early withdrawals from an IRA may be subject to an added 10% penalty (plus income tax on the distribution). However the main difference between an IRA vs. 401(k) is that IRAs tend to give individuals more control than company-sponsored plans—an individual can decide for themselves where to open an IRA account and can exert more control in determining their investment strategy.

Learning how to open an IRA is relatively simple—such accounts are available with a variety of financial services providers, including online banks and brokerages. This flexibility allows individuals to comparison shop, evaluating providers based on criteria such as account fees and other costs.

Once an individual opens an account, they may make contributions up to an annual limit at any time prior to the tax filing deadline. For tax year 2024, the limit is $7,000 ($8,000 for individuals 50 and older). For tax year 2023, the limit is $6,500 ($7,500 for individuals 50 and older).

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Roth IRA

There are a few key differences when it comes to a traditional IRA vs. a Roth IRA. To begin with, not everyone qualifies to contribute to a Roth IRA. The upper earnings limit to contribute even a reduced amount for tax year 2024 is $161,000 for singles, and $240,000 for married joint filers. The upper earnings limit for even a partial contribution for tax year 2023 is $153,000 for singles, and $228,000 for married joint filers.

Another thing that distinguishes Roth IRAs is that they’re funded with after-tax dollars—meaning that while contributions are not income tax deductible, qualified distributions (typically after retirement) are tax-free. Additionally, while an IRA has required minimum distributions (RMD) rules that state investors must start taking distributions upon turning 73, there are no minimum withdrawals required on Roth IRAs.

Like a traditional IRA, Roth IRAs carry an annual contribution limit of $7,000 for 2024 and $6,500 for 2023. Individuals aged 50 and up can make an additional $1,000 in 2023 and in 2024 in catch-up contributions. Roth IRAs also offer similar flexibility to traditional IRAs in that individuals can open online IRA accounts with a provider that best suits their needs—whether that means an account that offers more hands-on investing support or one with cheaper fees.

Self-Directed IRA (SDIRA)

Another 401(k) alternative is a self-directed IRA. A SDIRA can be either a traditional or Roth IRA.

But whereas IRA accounts typically allow for investment in approved stocks, bonds, mutual funds, and CDs, self-directed IRAs allow for a much broader set of holdings, including things like REITs, promissory notes, tax lien certificates, and private placement securities. Some self-directed IRAs also permit investment in digital assets such as crypto trading and initial coin offerings.

While having the freedom to make alternative investments may be appealing to some individuals, the Security and Exchange Commission cautions that such ventures may be more vulnerable to fraud than traditional investing products.

The SEC cautions that individuals considering a self-directed IRA should do their homework before investing, taking steps to confirm both the investments and the person or firm selling them are registered. They also advise investors to be cautious of unsolicited offers and any promises of guaranteed returns.

Simplified Employee Pension (SEP) IRA

A SEP (Simplified Employee Pension) IRA follows the same rules as traditional IRAs with one key difference: They are employer-sponsored and allow companies to make contributions on workers’ behalf, up to 25% of the employee’s salary.

Though the proceeds of SEP IRAs are 100% vested with the employee, only the employer contributes to this type of retirement account. To be eligible, the employee must have worked for the company for three out of the last five years.

Because people who are self-employed or own their own companies are eligible to set up SEP IRAs—and can contribute up to a quarter of their salary—this type of account can be an attractive option for those individuals who would like to put away more each year than traditional or Roth IRAs allow.

Solo 401(k)

Self-employed individuals and business owners may want to consider a solo 401(k). This type of 401(k) is designed for those who have no employees other than their spouse, and the way it works is similar to a traditional 401(k). Contributions are made using pre-tax dollars and taxed when withdrawn in retirement. (However, there are also Roth solo 401(k)s using after-tax dollars.) The biggest difference between a regular 401(k) and a solo 401(k) is that there is no matching contribution from an employer with a solo 401(k).

The total contribution limits for a solo 401(k) are $66,000 for tax year 2023, and $69,000 for 2024. Catch-up contributions for those 50 and older are an additional $7,500 for each year.

One thing to consider: There are extra IRS rules and reporting requirements for a solo 401(k), which may make these plans more complicated.

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How a 401(k) Differs From Alternatives

As mentioned, a 401(k) is an employer-sponsored retirement fund. 401(k) contributions are determined by an employee and then drawn directly from their paycheck and deposited into a dedicated fund.

Income tax on 401(k) contributions is deferred until the time the money is withdrawn—usually after retirement—at which point it is taxed as income.

During the time that an employee contributes pre-tax dollars to their 401(k) plan, the contributions are deducted from their taxable income for the year, potentially lowering the amount of income tax they might own. For example, if a person earned a $60,000 annual salary and contributed $6,000 to their 401(k) in a calendar year, they would only pay income tax on $54,000 in earnings.

There are annual limits on 401(k) contributions, and the ceilings on contributions change annually. In 2024, the limit for traditional 401(k)s is $23,000—a $500 increase over the 2023 limit (individuals 50 and older can contribute an additional $7,500 in catch-up contributions). If a person participates in multiple 401(k) plans from several employers, they still need to abide by this limit, so it’s a good idea to add up all contributions across plans.

A 401(k) can be a helpful savings tool for a variety of reasons. Because withdrawals are set up in advance, and automatically deducted from an individual’s paycheck, it essentially puts retirement savings on “auto-pilot.” In addition, employers often contribute to these plans, whether through matching contributions or non-elective contributions.

But there are also some drawbacks to the plan, including penalties for early withdrawals. There are also mandatory fees, which may include plan administration and service fees, as well as investment fees such as sales and management charges. It’s helpful to brush up on all the costs associated with an employer’s 401(k) and look into other 401(k) alternatives if it makes sense.

The Takeaway

With a number of 401 (k) alternatives to choose from, it’s clear there’s no one right way to save for retirement. There are a variety of factors for an investor to consider, including current income, investment interests, and whether it makes sense to invest pre- or after-tax dollars.

Ultimately, the important thing is to identify a good retirement savings account for one’s individual needs, and then contribute to it regularly.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

What is a better option than a 401(k)?

There isn’t necessarily a better option than a 401(k), but if you’re looking for another type of retirement savings plan, you may want to consider a traditional IRA or Roth IRA. These retirement savings plans allow you to invest your contributions in different types of investments, and you will generally have a wider array of offerings than you might get with a 401(k). Plus, you can have an IRA in addition to a 401(k), which could help you save even more for retirement.

How to save for retirement if my employer doesn’t offer 401(k)?

If your employer doesn’t offer a 401(k), you could save for retirement with a traditional or Roth IRA. Both plans allow you to contribute a certain amount each year ($6,500 for tax year 2023, and $7,000 for 2024), plus an additional $1,000 in catch-up contributions if you are 50 or older. With traditional IRAs, you contribute pre-tax dollars, and you pay tax on the money when you withdraw it in retirement. With a Roth IRA, you contribute after-tax dollars and then withdraw the money tax-free in retirement.

What 401(k) alternatives are there for the self-employed?

Some 401(k) alternatives for the self-employed include SEP (Simplified Employee Pension) IRAs and solo 401(k)s. With a SEP IRA, individuals who are self-employed or own their own companies can contribute up to a quarter of their salary. Solo 401(k)s are designed for self-employed individuals who have no employees other than a spouse, and allow for contributions of up to $66,000 in 2023, and $69,000 in 2024.

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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Apr

2024

Guide to the Sectors of the S&P 500 and Their Weights

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

The S&P sectors represent the different categories that the index uses to sort the companies it follows. There are 11 sectors that make up the S&P 500, and they include health care, technology, energy, real estate, and more.

Understanding how the S&P sectors work and break down further can help both institutional and retail investors manage risk through different economic cycles by allocating their portfolio across multiple sectors. For example, cyclical stocks and cyclical sectors tend to fare well when the economy booms. During a recession, however, defensive stocks may outperform them. However, it’s also possible for all 11 sectors to trend in the same direction.

What Is the S&P 500

“S&P” refers to Standard & Poor, and the S&P 500 index tracks the movements of 500 large-cap U.S. companies. A number of mutual funds and exchange-traded funds (ETFs) use this index as a benchmark.

Many investors use the S&P 500 as a stand-in for the entire market when it comes to investing, particularly index investing. But again, the S&P 500 can be broken down into specific sectors in which companies of particular types are concentrated — allowing investors to get more granular, if they wish, with their investment strategies.

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Examining the 11 Sectors of the S&P

The Global Industry Classification System (GICS) has 11 stock market sectors in its taxonomy. It further breaks down these 11 sectors into 24 industry groups, 74 industries, and 163 sub-industries. Here’s a look at the S&P Sector list, by size:

Technology
Health Care
Financials
Real Estate
Energy
Materials
Consumer Discretionary
Industrials
Utilities
Consumer Staples
Communications

1. Technology

Technology is the largest sector of the S&P 500. This sector includes companies involved in the development, manufacturing, or distribution of tech-related products and services. For example, companies in the technology sector may produce computer software programs or electronics hardware, or research and develop new technologies.

Tech stock investments are typically cyclical, in that they usually perform better during economic expansions. The technology sector includes a number of growth stocks, which are companies that reinvest most or all of their profits in expansion versus paying dividends. Examples of some popular tech stocks include:

• Facebook (META)

• Apple (AAPL)

• Microsoft (MSFT)

• Alphabet (GOOG)

• IBM (IBM)

2. Financials

The financials sector covers a variety of industries, including banking and investing. Banks, credit unions, mortgage companies, wealth management firms, credit card companies and insurance companies are all part of the financial sector.

Financial services companies are usually categorized as cyclical. For example, a credit card issuer’s profit margins may shrink during a recession if unemployment rises and people spend less or can not keep up with credit card payments. But this can be subjective, as mortgage companies may benefit during recessionary periods if lower interest rates spur home-buying activity.

Some of the biggest names in the financial sector include:

• Visa (V)

• JPMorgan Chase (JPM)

• Bank of America (BAC)

• PayPal Holdings (PYPL)

• Mastercard (MA)

3. Health Care

The next largest of the S&P sectors is health care. This sector includes pharmaceutical companies, companies that produce or distribute medical equipment, and supplies and companies that conduct health care-related research.

The health care sector also includes alternative health companies, including companies that use cannabis as a part of their medical research and product development.

Recommended: Cannabis Investing 101

More traditional examples of healthcare sector companies include:

• CVS (CVS)

• Johnson & Johnson (JNJ)

• UnitedHealth Group (UNH)

• Thermo Fisher Scientific (TMO)

• Regeneron (REGN)

Health care stocks are typically non-cyclical, as demand for these products and services usually doesn’t hinge on economic movements.

4. Consumer Discretionary

The consumer discretionary sector is a largely cyclical sector that includes companies in the hospitality and entertainment sectors, as well as retailers.

Examples of stocks that fit into the consumer discretionary sector are:

• Starbucks (SBUX)

• AMC (AMC)

• Best Buy (BBY)

• Home Depot (HD)

• Nike (NKE)

Generally, these companies represent things consumers may spend more money on in a thriving economy and cut back on during a downturn. That’s why they’re considered cyclical in nature.

5. Communications Services

This sector spans companies that provide communications services of some kind. That can include landline phone services, cellular phone services, or internet services. Communications also includes companies responsible for producing movies and television shows.

The communications sector can be hard to pin down in terms of whether it’s cyclical or defensive. In a down economy, for example, people may continue to spend money on phone and internet services but cut back on streaming services. So there’s an argument to be made that the communication sector is a little of both.

Companies that belong to this sector include:

• Comcast (CMCSA)

• AT&T (T)

• Dish Network (DISH)

• Discovery Communications (WBD)

• Activision Blizzard (ATVI)

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6. Industrials

The industrial sector covers a broad range of industries, including those in the manufacturing and transportation sectors. For example:

• Honeywell (HON)

• 3M (MMM)

• Stanley Black & Decker (SWK)

• Delta Airlines (DAL)

• Boeing (BA)

Industrials are often considered to be cyclical stocks, again because of how they react to changes in supply and demand. The airline industry, for example, saw a steep decline in 2020 as air travel was curtailed due to the coronavirus pandemic.

7. Consumer Staples

Consumer staples stocks represent things consumers regularly spend money on. That includes groceries, household products and personal hygiene products. The consumer staples sector is also a defensive sector because even when the economy hits a rough spot, consumers will continue spending money on these things.

From an investment perspective, consumer staples stocks may not yield the same return profile as other sectors. But they may provide some stability in a portfolio when the market gets shaky.

Companies that are recognized as some of the top consumer staples stocks include:

• General Mills (GIS)

• Coca-Cola (KO)

• Procter & Gamble (PG)

• Conagra Brands (CAG)

• Costco Wholesale (COST)

8. Energy

The energy sector includes companies that participate in the production and/or distribution of energy. That includes the oil and gas industry as well as companies connected to the development or distribution of renewable energy sources.

Energy stock investments can be more sensitive to economic movements and supply-demand trends compared to other sectors.

Some of the biggest energy sector companies include:

• Exxon Mobil (XOM)

• Royal Dutch Shell (SHEL)

• Chevron (CVX)

• Conocophillips (COP)

• Halliburton (HAL)

9. Real Estate

This sector includes real estate investment trusts (REITs) as well as realtors, developers and property management companies. REITs invest in income-producing properties and may pay out as much as 90% of profits out to investors as dividends.

Investing in real estate can be a defensive move as this sector is largely uncorrelated with stocks. So if stock prices fall, for example, investors may not see a correlating drop in real estate investments as property generally tends to appreciate over time.

Examples of real estate companies in the S&P 500 include:

• Digital Realty (DLR)

• American Tower (AMT)

• Prologis (PLD)

• Simon Property Group (SPG)

• Boston Properties (BXP)

10. Materials

The materials sector includes companies connected to the sourcing, processing or distribution of raw materials. That includes things like lumber, concrete, glass, and other building materials.

Materials is one of the cyclical S&P sectors, as it can be driven largely by supply and demand. During a housing boom, for example, the materials sector may benefit from increased demand for lumber, plywood and other construction materials.

Material stocks in the S&P 500 include:

• Dupont (DD)

• Celanese (CE)

• Sherwin Williams (SHW)

• Air Products & Chemicals (APD)

• Eastman Chemical (EMN)

11. Utilities

Utilities represent one of the core defensive S&P sectors. This sector includes companies that provide gas, electricity, water, and other utilities to households, businesses, farms, and other entities.

Since these are essentials that people typically can’t do without, they’re generally less sensitive to major shifts in the economic cycle. They also often pay dividends to their investors.

Examples of utilities stocks include:

• AES (AES)

• UGI (UGI)

• CenterPoint Energy (CNP)

• Duke Energy (DUK)

• Dominion Energy (D)

Recommended: How to Invest in Utilities

How Are the Sectors of the S&P 500 Weighted?

Given that the S&P 500 is composed mostly of the largest companies, its weighting is relative to the size of those companies and their respective industries. As such, that’s why technology, health care, and financials are relatively large compared to other sectors.

It’s also important to understand that things change over time — in terms of company and industry size and influence on the overall economy. Accordingly, the index itself changes, and weighting of specific sectors and companies changes as well.

Which Is the Largest S&P 500 Sector?

As discussed, technology, or information and technology, is currently the largest sector in the S&P 500. That’s in large part due to the tech sector’s growth over the past couple of decades, and certain companies within the sector becoming larger with massive market caps — companies such as Apple, Microsoft, Alphabet, Meta, Netflix, and others.

Which Is the Smallest S&P 500 Sector?

As of March 2024, utilities is the smallest S&P 500 sector, comprising a little more than 2% of the overall index. But the materials and real estate sectors are not much bigger.

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What Can You Do As an Investor With This Information?

Investors can tap their knowledge of the S&P 500 sectors to help inform their investing strategy and plan. As discussed, while some sectors tend to be a bit more volatile, investors may look at specific and strategic allocations in other sectors to help “smooth” things out during times of volatility in the market.

Further, sector investing can help investors diversify their portfolios, or find additional opportunities to invest.

The Takeaway

Knowing what the S&P sectors are and which types of industries or sub-industries they represent can help investors achieve diversification through different types of investments. While some financial experts liken the sectors to a pie, with several individual slices, it may be more helpful to think of them as a buffet from which investors can pick and choose.

You can either purchase stocks within or across sectors, or look for funds that can provide that diversification for you. It’ll all depend on your overall financial plan and investment strategy. If you need help honing that in, it may be beneficial to speak with a financial professional.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What are the S&P 500 sector weights?

As of March 2024, information technology is the largest sector in the S&P 500, comprising nearly 30% of the overall index. It’s followed by financials at 13%, health care at 12.5%, and consumer discretionary at 10.6%.

What is the sector breakdown of the S&P 500?

The eleven sectors of the S&P 500 are information technology, financials, health care, consumer discretionary, communication services, industrials, consumer staples, energy, real estate, materials, and utilities.

What is the smallest sector of the S&P 500?

As of March 2024, utilities is the smallest sector of the S&P 500, comprising 2.1% of the overall index.

Photo credit: iStock/izusek

SoFi Invest®
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2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Apr

2024

What Is the Difference Between APR and Interest Rate on a Personal Loan?

By Jamie Cattanach | Debt Payoff, Financial Independence, personal_loan, Terminology | Comments Off

When researching personal loans, you may see the terms APR (Annual Percentage Rate) and interest rate used interchangeably. However, they are not the same thing. The interest rate refers to the cost of borrowing money, expressed as a percentage of the principal amount, but it doesn’t include any other fees or charges.

APR, on the other hand, includes not only the interest rate but also other fees and charges you may incur when borrowing money. This makes the APR a more important number to look at that interest rate.

Read on for a closer look at APR vs interest rate, what it means when these two numbers are different, and what it means when they are the same.

What Is Interest?

Interest is the cost you pay for the privilege of taking out a loan — the money you’ll owe along with the principal, or the amount of money you’re borrowing.

Interest is expressed in a rate: a percentage that indicates what proportion of the principal you’ll pay on top of the principal itself. Interest may be simple — charged only against the principal balance — or compound — charged against both the principal balance and accrued interest itself. Typically, personal loan rates are an expression of simple interest.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

Loan APR vs Interest Rate

So what’s the difference between an APR vs. an interest rate?

APR stands for Annual Percentage Rate and specifically designates how much you’ll spend, as a proportion of the principal, over the course of one year. Furthermore, the APR includes any additional charges on top of interest, such as origination or processing fees, which a straight interest rate does not.

In other words, APR is a specific type of interest rate expression — one that’s more inclusive of additional costs.

Interest Rate	APR
Expression of how much will be paid back to the lender in addition to repaying the principal balance	Expression of how much will be paid back to the lender in addition to repaying the principal balance
Includes interest only	Expresses cost of the loan over one year including any additional costs, such as origination fees

Why Is My Personal Loan APR Different Than the Interest Rate?

If your personal loan’s APR differs from its interest rate, that indicates that there are additional fees, such as origination fees, included in the total amount you’re being charged. If there were no fees, the APR and interest rate would be identical.

How Important Is APR vs Interest Rate?

A loan’s APR is generally more important than its interest rate because APR reflects the true cost of the loan — it accounts for interest as well as any fees tacked on by the lender. Looking at APR also allows you to compare two loan offers apples to apples. One loan may have a lower interest rate than another loan but if the lender tacks on high fees, then it may not actually be the better deal.

APR vs Interest Rate on Revolving Credit Accounts

Personal loans aren’t the only financial product that involve APR and interest rate. Revolving credit accounts — including credit cards — also have interest rates expressed as APR. However, with credit cards, these two rates are one and the same: APR is just the interest rate, and the terms can be used interchangeably.

Credit card issuers may charge other fees, e.g., cash advance fees, late fees, or balance transfer fees as applicable to individual usage. But it’s impossible to predict the type or amount of fees that might be charged to any one card holder.

Although these two expressions are the same, it’s important to understand that the interest rate on credit cards and other revolving credit accounts is usually compound interest, which is precisely why it can be so easy to spiral into credit card debt. When interest is charged on the interest you’ve already accrued, the total goes up quickly.

A single credit card account can have multiple APRs, depending on how the credit is used.

• Purchase APR: the standard APR for general purchases.

• Cash advance APR: the rate charged for cash advances made to the card holder.

• Balance transfer APR: may begin as a low or zero promotional rate, but increase after the introductory period ends.

• Penalty APR: may be charged if a payment is late by a predetermined number of days.

💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.

What Is a Good Interest Rate for a Personal Loan?

The interest rate on your personal loan — or any financial product — will vary based on a wide variety of factors, including your personal financial history (such as your credit score and income) as well as which lender you choose, how big the loan is, and whether or not it’s secured with collateral.

The average personal loan rate is currently about 12% APR. However, the rate you receive could be higher or lower, depending on your financial situation and the lender you choose.

Getting a Good APR on a Personal Loan

To get the best rate on your personal loan, there are some financial factors you can influence over time. Here are some action items to consider.

Improving Your Credit

It’s been said before, but it’s true: the higher your credit score, generally the better your chances are of achieving favorable loan terms and lower interest rates — not to mention qualifying for the loan at all. While there are loans out there for borrowers with bad credit and fair credit, improving your credit profile can make borrowing money more affordable.

Paying Down Your Debts

One way you may be able to improve your credit is to pay down your debts. And along with the opportunity to bolster your credit, paying down debt can also improve your chances of being approved for a loan because your debt-to-income ratio is one factor lenders look at when qualifying you for a loan. What’s more, paying down debt can make keeping up with your monthly loan payments a lot easier, since you’ll have more leeway in your budget.

Be Careful When Applying for Credit

Applying for too much credit at once can be a red flag for lenders and ding your credit score, so if you’re getting ready to apply for a personal loan, auto loan, or mortgage, try to limit how many times you’re having your credit score pulled. Typically, prequalifying for a loan involves a soft credit pull, which won’t impact your credit.

While credit scoring models do allow for rate shopping, it’s still a good idea to compare multiple lenders over a limited amount of time — a 14-day period is recommended — to find the lender that works best for your financial needs. If done in a short window of time, multiple hard credit pulls for the same type of loan will count as just one.

Recommended: Soft vs Hard Credit Inquiry

The Takeaway

Personal loans and other financial lending products come at a cost: interest. That’s the amount you’ll pay on top of repaying the principal balance itself. Interest is expressed in a percentage rate, most commonly APR, which includes both the interest and any other fees that can increase the cost of the loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Why is my personal loan APR different than the interest rate?

If the annual percentage rate (APR) on your personal loan is different from the interest rate, it means the lender is charging additional fees, such as origination fees or others.

How important is APR vs interest rate?

The annual percentage rate (APR) is generally the more important figure to look at, since it includes additional costs incurred in getting the loan, such as fees. The APR will give you a more holistic picture of the price of the loan product.

What is a good APR and interest rate for a personal loan?

Personal loan interest rates vary widely but currently average around 12% APR. Depending on your personal financial history, the type and amount of the loan you’re borrowing, and your lender, the rate you receive could be higher or lower.

Photo credit: iStock/Charday Penn

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Apr

2024

What Are the Differences Between a Loan Officer and a Loan Processor?

By Jacqueline DeMarco | Debt Payoff, personal_loan, Terminology | Comments Off

When someone applies for a personal loan, there are a lot of moving parts and key players involved. While each lending institution will have their own unique process in place, loan applicants can expect to come across a loan officer, loan processor, or an underwriter.

There’s a decent amount of overlap in these roles, so to get some more clarity on who does what, let’s take a look at a loan officer vs. loan processor vs. underwriter.

What Is a Personal Loan Officer?

A loan officer evaluates loan applications and determines whether or not to recommend them for approval. A personal loan officer is a specific type of loan officer that focuses on personal loans. Personal loan officers are generally employed by credit unions, banks, and financial institutions.

Generally, a personal loan officer takes on the following job responsibilities:

• Contact potential borrowers to see if they need a loan.

• Work with loan applicants to gather information required for the application.

• Walk applicants through the different loan types available to them and their unique terms.

• Collect, verify, and review an applicant’s financial information (e.g., credit score, income, and other factors).

• Review any loan agreements to confirm they are in compliance with all state and federal regulations.

• Approve loan applications or pass them onto management for a final decision.

A major part of a personal loan officer’s responsibilities happen during the underwriting process. This process is used to determine if an applicant qualifies for the loan they are applying for. Once a loan officer collects and verifies all of the necessary personal and financial information about an applicant and any corresponding documents, the loan officer will assess the applicant’s need for a loan and their ability to repay it on time.

A loan applicant working with a loan officer can turn to them about any questions they have about what a personal loan is or about the application process. A personal loan is a type of consumer loan and consumer loan officers may use a fully automated underwriting process using software or they may complete it themselves (which is more often the case with smaller banks and credit unions).

💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

What Is a Personal Loan Processor?

A personal loan processor, also known as a loan interviewer or loan clerk, is responsible for interviewing applicants and other necessary parties to obtain and verify the financial and personal information required to finish the personal loan application. Once the applicant is approved for the loan, the personal loan officer will prepare any documents required for the appraisal and the closing of the personal loan.

Recommended: Where to Get a Personal Loan?

What Does a Personal Loan Processor Do?

The personal loan processor serves as a liaison between the financial institution issuing the loan and the applicant to make sure that qualified applicants can secure a loan in a timely manner. The loan processor will also help applicants decide which loan product is the best fit for their financial needs and goals. For example, if an applicant is experiencing financial hardship, the loan processor can help them set up debt payment plans.

Review Your Application

A loan processor receives, collects, distributes, and evaluates applicant information required to complete the loan application. They can approve or deny an applicant.

Verify Your Information

Personal loan officers are tasked with interviewing applicants and other necessary parties in order to verify any financial and personal information that must be evaluated during the application process.

Request Documents

As a part of the verification process, they will also request and collect any necessary documents from the applicant. They are also responsible for preparing any documents required for the appraisal and closing process.

Third Party Reports

In addition to collecting documentation from the applicant, the personal loan processor will work with third parties to obtain any necessary documents and reports, such as the applicant’s credit report.

Is a Personal Loan Processor the Same as an Underwriter?

While there is some overlap between what a personal loan processor and an underwriter do, these are two different roles. A loan underwriter focuses on evaluating how creditworthy an applicant is by collecting and evaluating an applicant’s financial information. Typically, they then use loan underwriting software to make an approval or denial recommendation.

A loan processor also reviews how eligible an applicant is for a loan by collecting and verifying important information and documents, but they don’t use underwriting software to make a decision. The loan processor has the ability to approve or deny an applicant.

Loan Processor	Underwriter
Collects and verifies applicant information	Collects and verifies applicant information
Makes approval decision	Uses underwriting software to determine eligibility
Prepares documents for appraisal and closing

Is a Loan Officer or Loan Processor Responsible for Your Personal Loan Approval?

When it comes to loan processor vs. loan officer, both loan officers and loan processors have the ability to reject or deny a loan application or, at the very least, make a recommendation for whether or not an applicant should receive a loan.

💡 Quick Tip: With lower fixed interest rates on loans of $5K to $100K, a SoFi personal loan for credit card debt can substantially decrease your monthly bills.

When Does a Personal Loan Processor or Officer Get Involved?

When someone applies for a personal loan, they’ll connect with a personal loan processor or officer when they submit their initial application. Either one can start the process of collecting personal and financial information and supporting documentation from the applicant.

What Happens During Personal Loan Processing?

During the personal loan processing stage, the applicant will work with the personal loan processor to provide them with any personal information, financial information, or documentation that the personal loan processor needs to finish their application.

Recommended: How Much of a Personal Loan Can I Get?

Getting Approved for a Personal Loan

Getting approved for a personal loan requires going through the underwriting process which assesses how qualified a loan applicant is. Some firms use underwriting software to make a decision whereas others make the decision without the aid of software.

The Takeaway

When comparing a loan officer vs. loan processor, it’s clear that both loan processors and loan officers play an important role in the personal loan application process. Their roles often overlap and where they work determines the exact role they take on.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Is a personal loan processor the same as an underwriter?

No, a personal loan processor is not the same as an underwriter, although they share similar responsibilities. A loan underwriter determines whether or not an applicant is creditworthy. A loan processor collects and verifies any personal and financial information required to complete loan applications.

What does a personal loan processor do?

A personal loan processor works with personal loan applicants to gather the information and documents needed to complete their applications. A personal loan processor also prepares appraisal and closing documents.

When does a personal loan processor or officer get involved?

A personal loan processor or officer gets involved once a consumer starts the application process. They can help guide the applicant through that process.

Photo credit: iStock/Delmaine Donson

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