It's time to evaluate the performance of your 401(k) plan over the past year. If your plan has grown, or at least done well relative to the markets at large, then you may not need to make any major changes to your investment portfolio. But if this is not the case, then this could be a good time to do some research and reallocate your assets within the plan. There are several factors to consider here, such as whether your current portfolio really fits your risk tolerance and investment objectives and also how your portfolio performed compared to its underlying benchmark indices.

TUTORIAL: Retirement Planning


Investment Objectives Change
If the Dow and S&P 500 rose by 5% during the year and your plan value is invested primarily in the stocks of those indices but dropped by 15%, then you need to find out the reason for this discrepancy and decide upon a course of action. Your investment objectives and risk tolerance also change as you age and it may therefore be time to reallocate your portfolio to keep up with your changing needs. If you just turned 60 and your portfolio is still invested entirely in aggressive growth funds, then you need to be aware of the potential risk that you are taking and be prepared to deal with what will happen if the markets move against you (which, of course, they inevitably will at some point). Another factor to consider in your 401(k) plan is the amount of your money that goes toward paying plan and investment expenses. Do you know how much you paid this year in fees? It's inevitable that you will pay something, but many plan participants would be surprised to discover that they are paying away 2 to 4% of their plan balances each year in administrative, insurance and investment management expenses.

Annuity Contracts
This is especially true if your 401(k) is invested inside an annuity contract. Many plans are funded exclusively with these vehicles, which are offered by an insurance company inside the company plan and typically provide a range of mutual fund choices, along with insurance riders that can guarantee certain living and death benefits. Of course, these riders come at a price, and most variable annuity contracts will only offer insurance protection on the condition that the plan participant surrender control of the money and receive an irrevocable payout upon retirement.

If you want to retain control over your assets when you retire, then you need to be certain that you have not signed up for this type of rider in your plan and are not paying for it.

If you are not satisfied with the performance of the investments within your plan, then you may want to consider taking an in-service distribution and rolling the allowable portion of your plan into an IRA that allows you to create your own portfolio. Finally, you should probably prepare (or have your tax preparer prepare) a hypothetical tax return for next year. If you are going to owe a substantial amount of money, then you may be wise to make some additional contributions to your plan before the end of the year in order to reduce your taxable income. (For more on insurance, check out Living And Death Benefit Riders: How Do They Work?)

This can be especially helpful if your employer will match your contributions in any manner. However, this should probably be done in November, because lump-sum contributions cannot be made into these plans; you have to contact your plan custodian or payroll department and have them increase your contribution percentage. Therefore, you may want to increase to the maximum amount allowed for the last month of the year and then reset this level in January (or keep it there if your plan is doing well).

The Bottom Line
A final consideration is whether you should roll your 401(k) over into a Roth IRA before the end of the year if you left your employer this year. This can be a good idea if you wish to avoid taking RMDs or have tax credits or deductions that will go unused without additional income to be credited against them. For more information on what you should do with your 401(k) plan before the end of the year, consult your HR department or financial advisor. (For an in-depth analysis of shortfalls associated with this type of retirement plan, read 6 Problems With 401k Plans.)

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