Once you get your hard-earned dollars into your 401(k), it’s painful to think they might not be getting you the highest return possible. Before you go any further, those who aren’t contributing regularly to a 401(k) or another type of tax-advantaged retirement account, such as a Traditional or Roth IRA, need to start now. While making that 10 or 15 percent contribution from your paycheck can be tough, there’s no excuse to not plan for supporting yourself in your old age.
With that in mind, how do you make sure those dollars you’re stashing away will get you the highest return possible?
• The funds you select in your 401(k) plan could be charging you sky-high fees. You probably know the money you’re putting away in a 401(k) doesn’t get managed for free. Not only are there fees associated with the plan itself, which can either be borne entirely by your employer or partially passed on to you, but the funds your 401(k) is invested in each charge a certain amount as well. Over a lifetime, 401(k)-related fees could cost a median-income, two-earner household about $155,000—or almost a third of their total investment returns—according to a projection by think tank Demos. To minimize the hit fees are taking on your savings, look for funds with a low expense ratio. A lower expense ratio translates to a lower cost to investors. Research the expense ratios of funds in the prospectus (the in-depth document that discloses fund’s financials.)
• An IRA has more investment options—meaning you can go after higher-yielding asset classes. If you’re researching how to optimize your retirement savings returns, you need to look into what (specifically) your funds are investing in. Some financial advisors will tell you rolling your 401(k) into an IRA is a smart move, because an IRA gives you the option to put money into funds that invest in real estate, foreign markets and floating rate funds, among other higher-yielding asset classes. However, don’t forget the cardinal rule of investing: with higher rewards come higher risks.
• Don’t just equally divide your money between the funds your plan offers. Some people equally divide their 401(k) contributions into all the funds offered, thinking that means their investments are now properly diversified. Diversification is key, but it does not mean simply putting money into all the funds. The list of fund choices was not selected to represent a balanced portfolio overall. For example, if you put 10 percent of your total contribution into, say, each of the 10 funds offered, you could end up with, a portfolio that is 80 percent invested in U.S. equities—or another random and unbalanced assortment of investments. When you pick funds, do your research and take your age and retirement goals into account.
There’s no guaranteed way to get higher returns when you’re investing—that’s true for everyone, from Joe Schmoe putting money in a 401(k) to the most savvy Wall Street pro. But if you want to get the most out of your dollars, do your research. Don’t ignore fees, consider the different investment options IRAs offer you and don’t simply allocate your money evenly between the funds you’re offered. With a little oversight and thought, your 401(k) will be able to give you a comfortable retirement.
Amelia Granger is an analyst at NerdWallet, a website dedicated to providing unbiased financial information. NerdWallet recently launched the Ask an Advisor platform, a new way to fin a quality financial advisor and to read advisors’ answers to personal finance questions, including what to do with your retirement savings.