Getting the Most Out of Your 401(k) Plan
*** This article originally appeared in the Salt Lake City Chamber of Commerce magazine
More than 70% of workers with the option to invest in 401(k) plans either don’t participate in them or don’t fully understand them. Here are some simple tips for getting the most out of your 401(k) plan:
Participate. Find out if your employer has a matching program for 401(k) contributions and if so, up to what level of contribution. Then make sure you’re contributing, at a minimum, that amount. There’s nothing like an instantaneous, tax-deferred 50 or 100% return on your investment.
Allocate. Choose the funds to which your contributions are allocated. In many plans the default investment choice, if a participant fails to choose, is the stable value or money market option [or a target date mutual fund], which in this environment is barely keeping pace with inflation.
Diversify. Make sure your investment choices result in a diversified portfolio. One way to wring returns from a portfolio is to be in a position to weather the storm when the market takes a turn for the worse. Your plan provider, human resources department, (or a financial adviser) may be helpful in educating you here.
Rebalance. Every year or two, rebalance your 401(k) holdings to offset the under- or outperformance of various asset classes. There are no tax consequences, and this process will keep you from chasing past performance.
401(k) plans can be fantastic wealth-building tools. Use yours to full advantage, and start building toward a brighter financial future.
More On Getting the Most Out of Your 401(k) Plan
We are becoming increasingly responsible for saving for our own retirements. Social Security benefits are up in the air, and even healthy companies are cutting back on traditional pension plan benefits in favor of defined contribution plans. Here are some more tips for getting the most out of your 401(k) plan:
Max Out. Contributions that aren’t matched are still tax-advantaged. They are withheld from your pay before tax is deducted and any earnings accumulate on a tax-deferred basis. This year you can contribute up to $23,000, and those older than 50 can contribute as much as $30,500.
Watch Out. Many plans offer the company stock as an investment option. To limit your exposure to the future fortunes of your employer, try to keep this allocation to a fairly small percentage of your total retirement assets, say 10%.
Speak Out. Do a little homework to find out the fee structure of the plan. Smaller plans, in particular, can be subjected to excessive expenses levied by consultants, administrators, and other service providers. If you feel this is the case, raise the issue with your benefits department. Fees and expenses are increasingly important to investment results in a low-return environment.
Along the same lines, speak out if you feel your plan’s investment options are poor performers or are too limited to offer you enough diversification. It’s your retirement money after all, and the responsibility for its growth is being placed squarely on your shoulders.
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.