401(k) Investment Strategies Through the Years

Tips for making the most of your 401(k)

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Roger Wohlner
The past several years have been rough on 401(k) participants. The 2008–09 market decline had a devastating impact on many participants nearing retirement, both in terms of their account balances and their psyche. Meanwhile, the recent declines this year have renewed the fears of many 401(k) investors.

The reality is that your 401(k) account is a key component in your retirement savings strategy.  Here are some tips for making the best use of your plan over the course of your career.

For those who are starting out in their careers, my suggestion is to contribute as much as you can afford. At the very least, try to contribute enough to receive the full company match. You have the luxury of time and the ability to take advantage of many years of compounding your investment returns. In choosing an investment allocation, younger investors should keep in mind that they have the time to weather the inevitable market declines that will occur periodically.

For those of you in the middle of your career, you should think about maxing out your contributions. This can be tough, especially if you are also trying to save for your kids’ college educations, let alone incurring the ongoing costs of raising a family. The expectation at this point is that your career is on the move and your compensation is rising as well. By this point, hopefully you’ve done some financial planning. Your retirement plan allocation should be an outgrowth of your plan and should be done in harmony with investments that you might have in outside accounts such as IRAs, a spouse’s retirement plan account, etc.

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As you get closer to retirement, continue to max out your contributions. You might be in the middle of your kids’ college years as well. Keep in mind that the best gift you can give your children is not being a burden to them financially in your old age. Save all you can at this stage.

Here are some 401(k) investing tips for any age:

  • Diversify. Allocate your assets in accordance with your retirement goals and your risk tolerance. If you have investments outside your 401(k) plan, allocate your 401(k) as part of an overall portfolio, not as a stand-alone account.
  • Take full advantage of any company match. This is essentially free money, and for most investors it makes sense to invest at least this much in the plan, even if it is sub-par.
  • To the extent that you opt out of your organization’s retirement plan or reduce the amount that you contribute, be sure to save the maximum that you can afford in another vehicle such as an IRA or other retirement account. One of the major advantages of a 401(k) is the automatic savings feature. It is easy to say that you will contribute to an IRA or invest in a taxable account, but unfortunately, all too often I see well-intentioned people fail to follow through.
  • If your retirement plan is lousy, try to choose the best couple of funds in the plan and focus your contributions there. This assumes you have investments outside of the plan and can balance out your overall allocation with those outside investments.
  • Don’t assume that your 401(k) alone will be sufficient for retirement.
  • If you go with the plan’s target-date fund, make sure you understand the pros and cons of this option.
  • Don’t overindulge on your company stock if that is a plan investment option. If you don’t know why this can be hazardous, just find a former Enron employee, who can unfortunately speak volumes about this.
  • If you think your company’s plan could be improved, talk to the plan’s administrator. Do your homework first and approach him or her in a polite, businesslike fashion. Your 401(k) plan is likely your biggest retirement savings vehicle. Take control and make it work for you.

    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. Roger also blogs at Chicago Financial Planner.