By Barry Glassman, CFP
WTOP Financial Contributor
WASHINGTON — When you first start a job and become eligible to contribute to a 401(k) or employer- sponsored retirement savings plan, you fill out a few forms, decide how much you want to have deducted from each paycheck and pick some investment options. Then, each month, like clockwork, money is taken from your paycheck and put into your retirement account automatically. It’s easy to just “set it and forget it” but this mindset can lead to costly mistakes.
Here are the most important things you can do to avoid them.
1. Reconsider automatic enrollment in a target date or age-based fund
If you don’t choose specific investments offered by your plan for your retirement dollars, then your plan will automatically enroll you in a target date or age-based fund. These funds consider your current age and a theoretical retirement age of 65, and automatically adjust their investment allocation becoming more conservative the closer you get to your retirement age.
But the risk in these funds can vary greatly and may not be appropriate for you depending on your risk tolerance and goals. For instance, if someone wants to retire in 20 years, one target date fund may have a 50 percent stock allocation and another may have 70 percent of their investments in stocks. If you are invested in a target date fund, it’s a good idea to look at the overall investment allocation to make sure you are comfortable with it.
2. Re-evaluate your investment choices
If you did select investments when you enrolled in your 401(k), but haven’t looked at them in a while, that allocation may no longer be appropriate. You may have taken on more risk than you intended, especially if you haven’t rebalanced your account. (See #3.) There may be additional investment options with lower fees or an allocation that is a better fit for your goals. Many employers and retirement plans offer access to model portfolios and financial advice to help you stay on top of your retirement account.
3. Set up automatic rebalancing
One of the best, easiest and most underutilized features to put in place is automatic rebalancing. In fact, according to Aon Hewitt, just 9 percent of 401(k) participants have set up this auto-rebalancing feature where it is available.
As an example, let’s say that a participant chose an allocation of 50 percent stocks and 50 percent bonds in their 401(k). Given the heated stock market, over time the percentage of their account allocated to stocks might grow to 70 percent or more, exposing them to additional risk. By switching on the rebalancing feature in their 401(k), the account would automatically sell stocks and buy bonds to return to its intended allocation. Think of it as a sell high/buy low feature. Automatic rebalancing helps to keep risk in check and can potentially enhance returns.
4. Review your beneficiaries
Probably the most common mistake is filling out those beneficiary forms, and then forgetting about them. This one-page document, not your will, decides who gets your retirement account. Should something happen to you, your family members may be shocked to find out that your ex-wife gets the 401(k) money.
Since retirement plan beneficiaries are determined by who is named on your beneficiary designation form, if you got married, had some kids, or got divorced, chances are it’s out of date. Most plans give you online access to these forms so making changes is easy to do.
Automation makes it easy to manage your 401(k) investments, but it can’t think for you. Remember that this is the money you will depend on in retirement, so take the time to make sure you’ll get the most out of it.
Editor’s Note: Barry Glassman, CFP
