With the Department of Labor's new fee disclosure requirements for 401(k)s, many people are finally waking up to the devastating affects of high fees on their retirement plans. The immediate and obvious step to take is to voice your concerns to the plan administrator in hopes of getting better options. But let's face it, changing funds is an involved decision for any company that won't happen overnight. Rather than waiting and not doing anything in the meantime, here are a few steps you can take today with your 401(k) that will help you keep more wealth for yourself.
Eliminate the accounts with subpar fund choices by rolling money into a rollover IRA. Try to locate all your stale 401(k) accounts from past employers and make a list. Money in accounts with bad choices should be rolled over to a rollover IRA, where you can invest in very low cost investments. Some 401(k)s even allow current employees to roll over part of their balance. Call your plan custodian to find out if you can transfer more of your money to an account with better choices. Consolidating accounts also makes managing wealth much easier. At the very least, investment maneuvers such as rebalancing are simpler when you aren't dealing with many different accounts.
You don't have to consolidate everything though. Keep the 401(k) with the best fund choices. You may find that one of the 401(k)s, usually offered by a large company you worked at, has amazing choices. Keep that one. In fact, look to see if you can roll money into the 401(k) plan that has the awesome offerings.
Never miss an opportunity to convert money into a Roth in low income years. This will sound counterintuitive, and the reality is obviously more complicated than what I'm outlining here, but periodically losing your job may actually benefit you because of our complex tax system. In low income years, you can convert part of your pre-tax wealth to a Roth IRA. You need to work out the numbers to make sure you know exactly how much you are converting, but you could end up paying no taxes or a very low tax rate on a certain amount that you convert. In some return scenarios, you could more than make up for the lost income from not working temporarily.
Don't give up a match, but consider other options if fund choices in your 401(k) plan are sub-par. You should always contribute to your 401(k) up to the amount your employer matches, but consider a Roth IRA and traditional IRA as an alternative vehicle for your contributions once you meet the minimum to get the full match.
Most people should aim to put money in pre-tax, unless you are in a very low tax bracket, very young or can easily put in the maximum amount each year and want more tax-advantaged space. Still, there's something to be said about tax diversification since the future is unknown. Having money in after-tax and pre-tax accounts offers additional flexibility that can help you save even more on taxes down the road in retirement.
Put more money in
your 401(k). Very few people are maxing
out their retirement accounts, but the tax advantages are amazing, even
when you take into account potentially bad fund choices. Any dollars you waste
on spending are 100 percent lost. Even if your 401(k) plan has high fees and
poor investment choices, it will still beat spending the money. Try to save a
bit more, and you certainly will end up with more in retirement.