This has been a good year for equity investors. Many major stock market benchmarks are at or near record highs. These investment gains have pushed balances in the accounts of many 401(k) participants higher as well. While this is good news, 2014 is a new year. Here are five tips to get (or keep) your 401(k) in shape for 2014 and beyond.
Increase your contributions. The biggest determinant in the amount accumulated at retirement is the amount saved. Assuming you aren’t already maxing out your salary deferrals, here are a few steps to take:
Review your investment options. This is the time of year when many companies change some or all of the investment options in their plans. If you haven’t looked at what is offered in your 401(k) plan lately, this is a good time. These changes might warrant some adjustments in your personal investment strategy.
Rebalance. If you have an asset allocation strategy for your 401(k), you are likely overweight in the equity portion of your account. This is a good time to rebalance your account back to your intended allocations. Letting your equity allocation go unchecked in hopes of capturing any additional gains is tempting, but it also exposes you to more risk than you might be comfortable with.
An even better solution for the future is to utilize the automatic rebalancing feature of your plan if one is available. I generally suggest annual or semiannual rebalancing. This ensures your account is periodically reset to your intended allocations and helps you to control the level of risk.
Don’t default to a target-date fund. The fund companies make it seem simple: Just invest in the target-date fund with a date closest to your anticipated retirement, hold the fund throughout your career, into retirement and until death, and you will be fine. No investment solution is this simple. For starters, if you do go the target-date fund route, at least make sure you look under the hood and understand what you are investing in.
Target-date funds from different providers can differ greatly in terms of their asset allocation and glide path (an investment mix that grows more conservative over time) into retirement, even among funds with the exact same target date.
Target-date funds can be solid choices for younger investors, as they offer instant diversification and are generally aggressively-allocated for longer target dates of 2050 and beyond. However, I’m not convinced that they are a good choice for investors with 20 years or less until retirement. By this time, folks should have accumulated some money in their accounts and possibly have investment accounts outside of their 401(k). These investors will often benefit from a more tailored 401(k) allocation among the plan’s open investment choices.
Manage your 401(k) as part of your overall portfolio. One of the biggest mistakes 401(k) investors can make is to ignore their investments outside of their 401(k) when allocating their account. I am a firm advocate of an investment strategy based on a financial plan. As a key element in your retirement savings strategy, your 401(k) account should be managed as part of an overall portfolio, which may include your spouse’s 401(k), Individual Retirement Accounts old 401(k) accounts, taxable investments and more.
Although I am generally an advocate of a balanced 401(k) allocation that is appropriate for your growth needs and risk tolerance, in some cases it may make sense to overallocate to one or two plan choices. I’ve generally done this with clients when their 401(k) plan is lousy, but we still want to utilize this as a retirement savings option. In those instances, we overweight the one or two solid options in their plan and use the client’s other investment accounts to round out his or her overall portfolio allocation.
The end of the year is a time when many folks flock to the gym in an effort to get a jump-start on their resolution to improve their physical fitness. It is also an opportune time to get your 401(k) account in shape as well.
Roger Wohlner, certified financial planner, is a fee-only financial advisor at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger’s popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments and retirement plans.