A bad 401(k) can be painful.
Despite the stock market gyrations of the past few months and a prolonged partial government shutdown, many indicators show the U.S. economy remains robust, backed by a labor market that continues to add jobs at a steady clip. That market and government uncertainty have many Americans looking at how their portfolio performance and job situations are affecting their overall financial picture, which for millions of workers is encapsulated by their employer-sponsored retirement plans. While a great 401(k) plan goes a long way toward bolstering your financial picture by accumulating tax-deferred contributions, a bad one can severely hinder your progress toward goals.
Features of a strong 401(k) plan.
A great 401(k) plan is easy to spot. It has immediate automatic enrollment, annual automatic escalation of your employee contributions, a matching contribution — and/or other employer contributions such as profit sharing, brief vesting schedules, low fees, a sufficient variety of high-quality investment choices, a user-friendly website and access to live experts who can explain plan details to you in simple language.
Your fund has a must-have list.
Of all the features of a 401(k) plan, the most important are your employer match, low fees and investment choices. Larger companies are likelier than small firms to offer competitive employer matching, which is effectively free money so the more, the better. Your 401(k) may have numerous fees tied to investment funds and account administration, all of which can significantly hamper your retirement savings unless those fees are low enough. You also want about 20 well-rated investment choices that provide risk-based diversification through domestic and international securities as well as exposure to other asset classes.
Choose funds with lowest costs.
Use the lowest cost funds in the plan that align with your risk profile. This approach may be justified if your 401(k) is saddled with exorbitant fees and constrained by too few investment options. Sticking with the lowest cost funds available to you, per your risk tolerance, is one way to limit the impact of fees on your investment returns.
Choose a passive approach.
Over the span of many years, it’s nearly impossible to forecast how any particular fund will perform versus competitors. Yet, even employer-sponsored retirement plans with poor active managers often offer passive investment approaches with regular rebalancing as the worker gradually adopts more conservative risk tolerances. Investing in those options instead of higher-risk, active trading over the long term may shift the odds of gains in your favor.
Use the plan’s brokerage window.
Use the brokerage window in the plan, with the guidance of your financial advisor. Buying and selling securities through the self-directed feature of a 401(k) plan will probably come with its own set of fees. However, if your plan has this option, this can give you access to many more investment choices, including stocks and bonds as well as potentially lower-cost funds than those available in the standard employer-sponsored plan.
Check with your advisor.
Just make sure to consult with your financial advisor about how this broader universe of investments should factor into your financial picture. A good advisor will look at the brokerage window as a potential way of salvaging your retirement strategy, rather than as a means of conducting haphazard trades. The right advisor can help guide your choices so you don’t find yourself selling a poor performing mutual fund, after its already lost much of your nest egg, that might have been more aggressive than you ever wanted.
Talk with your employer.
It is worth the attempt to talk to your employer about how and why to improve the plan, especially in small firms. In a small firm, you are a highly valued staff member and if enough of your coworkers make the same case that can facilitate change. Small business owners recognize the need for retaining top talent and are receptive to the strategic or economic rationale for implementing upgrades. Financially stable employees who feel their employer has their best interests in mind tend to be more productive and reliable than those who worry about being able to retire and, therefore, could be eyeing an exit to improve their fortunes.
Maximize your contributions.
Max out contributions to an individual retirement account before contributing to your 401(k) above the match. To be sure, in most cases, it’s best to make the maximum contribution in your 401(k) plan and at the least enough to capture any employer match. But if the plan fails to stack up — and your employer refuses to make basic upgrades — maxing IRA contributions once you’ve maximized any employer match, may be the better strategy than putting more into the 401(k). In general, IRAs offer more investment choice and may be less expensive. This may also allow you to select lower-priced funds and see similar tax advantages in most cases to your 401(k).
How to review your 401(k) plan.
With market volatility resurgent and the U.S. economic expansion approaching its 10th year, now is the time to review the strength of your 401(k) plan and to make the most of your financial situation if your employer-sponsored retirement plan is not so strong. Here are key points to remember:
— Good 401(k) plans have immediate automatic enrollment, annual automatic escalation of your employee contributions and a matching contribution.
— Choose funds with lowest costs.
— Choose a passive approach.
— Use the plan’s brokerage window.
— Check with your financial advisor.
— Talk with your employer.
— Maximize your contributions.
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8 Things to Remember When Reviewing Your 401(k) originally appeared on usnews.com
