15 Signs Your 401k Needs Some HelpSubmitted by Castlebar Asset Management on May 28th, 2015
Your 401k is one of your greatest tools to save for retirement. Most 401k plans need somewhere between a tune up to a complete overhaul to get it on track. Whether you have a 401k, 403b or other work place plan here are 15 signs it needs some attention.
1. Salad Bar Approach: When you initially signed up or revisited your investments in your plan you picked your funds by selecting a little of this and a little of that. This is what I call the salad bar approach when you select a few things here and there but don’t have an overall game plan. Selecting the right investment mix and the proper funds will improve your outcomes over the long term.
2.What’s My Risk Tolerance? Your personal risk tolerance is extremely important in determining your investment allocation. If you have not taken this into consideration you may be taking too much risk or not enough and this will have an impact on your overall returns. If you want to know what your risk number is click here.
3. Don’t Know Your Plans Basic Information: You don’t have to be an expert on your 401k plan, but you should have a grasp on some of the basics of your plan. You should know the rules about your company’s matching contribution. Another important feature to know is if your company’s plan has a Roth option. Lastly, you should know who to email or speak with at your company about your firm’s plan.
4. You Have Not Changed Your Contribution In Years? If you have not adjusted your contribution since you started working for your company or it has been a few years since you have revisited your contribution it is time to take a look at it. As you receive raises you should take a portion of your new income and allocate it to your 401k.
5. You Are Using the Default Target Dated Funds: Target dated funds can give investors a sense of compliancy when it comes to investing. These funds will slowly reduce your risk as you get closer to your retirement date. This sounds great but you pay a premium to own these funds for the convenience of this feature. Also target dated funds are tailored for the average person retiring in a specific year. They may be too risky or not aggressive enough for your particular situation. We normally steer clients away from these fund because they are expensive and we can tailor a specific investment allocation for them.
6. Cash Is King, Right? I see so many 401k plans where people are invested in money market funds. In our current low interest rate environment, cash is not king. Whether money market is your plans default option, you selected it because you needed to do more research or picked it because you did not know what to do, money markets or cash will not provide you the returns to meet your retirement goals.
7. Don’t Know How Much You Are Paying In Fees: Evidence suggests that paying for more expensive mutual funds does not lead to better performance. Keeping your expenses low will help you boost your returns and allow you to compound your money faster.
8. Can’t Remember or Have Not Checked Your Beneficiaries? Having your beneficiaries in order is an often overlooked part of your 401k. If you have created a trust or had another life event like a divorce it is important to make sure your primary and contingent beneficiaries are updated. If you have not named any beneficiaries and you pass away your 401k will have to go through probate.
9. Own Annuities In Your Plan: I see annuities more frequently in 403b plans. I really dislike seeing them in retirement plans. They are usually expensive, they have high surrender fees and the death benefits are almost never used. Avoid them if you can!
10. Own Your Company’s Stock: Owning your company stock is ok as long as you own a reasonable amount. If you own a double digit percent in your 401k plan this can lead to a variety of potential problems. If your company match is in their stock you should plan to sell it down in a planned manner. You can read a longer post on this topic here.
11. Forget To Rebalance: Rebalancing your 401k is an important step in maintaining your account. If stocks outperform bonds over a period of time your investment allocation will drift towards being overweight in stocks. This can cause issues when a sell off or bear market occurs for stocks. Rebalancing your account once a year is a good way to stay on track. Many 401k plan now offer an auto rebalance feature. All you have to do is turn it on and it will handle this for you.
12. This is a Piggy Bank, Right? Your 401k is there for your retirement. It is not there for your vacation fund or emergency fund. Tapping your 401k is a last resort in the event you need money quickly. Loans or a distribution will reduce your ability to compound wealth and trigger possible tax bills and penalties.
13. Am I Contributing Enough? How much should you be contributing to your 401k? The answer is usually more, unless you have reached the max contribution level. Working with a financial planner can help to right size your contribution and move you beyond contributing just to get your employer’s match. The contribution amount alone won’t be enough to meet your retirement goals.
14. Don’t Know How Your 401k Fits Into Your Overall Financial Plan? You have your 401k, your spouse has there 401k and you both have a few brokerage or rollover IRAs. How are all of these accounts working together to accomplish your financial goals? If you don’t know how your 401k fits into your overall financial plan it is time to meet with a financial planner.
15. Have Not Looked At Your 401k Since… If you are like many people and have not opened your paper statement or logged in a while, it is time to pay attention to your 401k! Reviewing your account once or twice a year will lead to better results and improve your chances of retiring on time.
Taking care of your 401k or work place retirement plan should be easier. If you have questions about your 401k we have a flat fee 401k Review Service where we can help get your 401k on the right track. You can read more about it here or send me a email and I would be happy to tell you more about it.
Andrew Comstock, CFA
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.