Much has been written about the retirement savings crisis in the United States, and the shortcomings of 401(k) plans. Nonetheless, they are the main retirement savings vehicles for many. Assuming that we all wake up on Saturday and the world has not ended, here are some moves to consider now and for the future top make sure that you are getting the most from your plan.
Increase your salary deferrals. I've read many studies pertaining to retirement success. Virtually all of them cite the amount saved over one’s working life as the single biggest factor in achieving a financially successful retirement. If you aren't deferring the maximum allowed, try to increase the percentage of your pay that you defer by at least 1 percent. If your plan offers an auto-increase feature enroll in it. This will make sure that the percentage deferred increases by an amount that you specify each year. At the very least, make sure you are contributing enough to earn any match offered by your employer.
Treat your 401(k) as part of an overall portfolio. When deciding how to invest your 401(k) account, make sure it’s in harmony with your outside investments. This might include a spouse’s retirement plan, various IRAs, old 401(k) accounts left at former employers, taxable accounts, various individual stocks and bonds, and other investments such as rental property. The point is to view your 401(k) account in light your overall portfolio and your financial plan and allocate your holdings accordingly.
Review your 401(k). Establish a system and a timetable (every quarter, for example) to review your account at regular intervals and rebalance when holdings fall outside the target allocation range you have set. Even better: take advantage of automatic rebalancing if it’s offered by your plan. If you are uncomfortable doing this, take advantage of any advice services offered by your employer or work with a professional financial adviser.
Understand any recent changes made to the plan. Companies often roll out new investment choices or make other changes to their plans towards the end of the year. Make sure that you have reviewed these changes and their impact on you. Adjust your allocation to include any new funds that might fit with your goals. Perhaps there are changes in the match or the plan will be offering a Roth option.
Don’t default to a target-date fund. Target-date funds have been portrayed as an easy, hands-off investment. The reality is that different funds from different families with the same target date often have widely different allocations and levels of investment risk. The quality of the underlying funds differs among various fund families. Expenses can vary widely. Some funds simply roll up the expense ratios of the underlying funds; others tack a management fee on top of the fund expenses. Don’t automatically default to the fund with the target date closest to your projected retirement. Instead, look at the allocation of the various funds in the series and pick the one that best fits your situation. Personally, I like target-ate funds for younger workers who might not have much in the way of outside investments. However if you are within 15 or so years of retirement you need to have a portfolio and a financial plan that are working in harmony.
Your 401(k) plan is one of the more important benefits offered to you by your employer. It is up to you to ensure that you are realizing the full value of this benefit.
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. Read more about Roger here.