6 Tips for 401(k) Success

The target-date fund closest to your projected retirement date may not be right for you.


The topic of retirement readiness has been in the news quite a bit lately, focusing attention on a serious issue staring many Baby Boomers in the face.

The 401(k) is the primary retirement accumulation product for many of us. Here are some tips for managing this asset. While following them is not a guarantee of a successful outcome, these tips will certainly help you down this path.

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Manage your 401(k). This is as opposed to ignoring it. As an adviser to both plan sponsors and individual clients, I see far too many participants who seemingly never review their statements. They made an investment selection once and feel that is their total involvement. Your 401(k) is a part of your overall investment portfolio. Hopefully your selections are driven by your financial plan. Just as your plan needs periodic review, so does your 401(k) account. Do you need to rebalance? Have funds been added or removed? Has the company match changed? Can I afford to increase my contribution percentage? Do my investment choices still make sense for me?

View your 401(k) as a part of your overall portfolio. Far too many participants invest their 401(k) dollars in a vacuum. They don't view it as part of their overall portfolio, which might include a spouse's retirement plan, IRA accounts, taxable accounts, old 401(k)s, and annuities. This can cause you to take too little or too much risk in the 401(k). Further, if your plan is lousy, viewing it in the context of your overall portfolio might point you towards focusing on the one or two decent choices in the plan while using your other accounts to invest in other areas included in your overall investment strategy.

Don't assume the target-date fund closest to your projected retirement date is the right one for you. Using target date funds may or may not be a good option for you, and the fund closest to your retirement date may not be appropriate for your needs. You are free to invest in any of the target-date funds offered by your plan, but if you go this route, be sure to look at how the fund invests.

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Manage your company stock allocation. The issue here is concentration and risk. If you work for a public company that either uses stock for the company match or a contribution to your profit sharing plan, or if you are deciding how much of your own contribution should go toward company stock, think this through very carefully. Also, consider stock you hold in taxable form, as well as options or restricted stock units that you might hold or be granted in the future. If you work for Apple and held their stock for the past 10 years you would be ecstatic. On the other hand, Microsoft stock has been "dead money" over the past 10 years. Among the worst cases are the poor former Enron employees who held sizable amounts of their retirement assets in the stock.

There is no right answer as to what percentage to hold, but the risk is great here. If the company and the stock suffer a severe setback, you might find yourself jobless, while seeing the value of your 401(k) plummet at the same time.

Make a proactive choice regarding your plan balance when you leave your employer. It's common for a new individual client to come on board with financial clutter. Old 401(k) accounts are a major source of this clutter. Leaving your account with your old employer can be a solid choice, but do this because you've analyzed your options and have decided this is the best route for you. Rolling this account and any other old 401(k)s into an IRA is also a solid choice, but be sure to do a trustee to trustee transfer instead of taking a distribution if your intent is to keep the tax-deferred status of the account.

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If your plan offers an advice option take advantage of it if you need help. Many plans offer advice options ranging from online to over the phone to in person. If you are not comfortable investing on your own, at least take a look at what is offered. (Full disclosure: I recently founded Retirement Fiduciary Advisors with a partner. We provide direct one-on-one investment and retirement advice for retirement plan participants.) Additionally, if you work with a trusted financial adviser already, advice on your retirement accounts should be a part of the fee you are paying. If you are not comfortable doing this on your own, get help. Retirement is too important to "dabble" with.

While nothing will guarantee retirement or investing success, following these tips will help ensure that you are on top of managing your retirement plan as a part of your overall financial strategy.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill. where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn.