7 Tips to Manage Your 401(k)

Stay on top of your funds—don't just contribute and forget about it

Today, many companies use 401(k) plans for creating retirement accounts for their employees. A portion of your paycheck—often along with a little matching-fund incentive from your company—goes into an account and you are charged with managing the allocation of those funds into an offering of investment products.

Gaining a grasp of some of the 401(k) plan foundations will help you manage your fund with greater authority and ease. With the right basic principles in place, you'll be better positioned to make the decisions that relate to your individual financial situation.

Key Takeaways

  • Getting professional help to manage a retirement account has been shown to increase 401(k) investors' returns.
  • If your employer offers a match, be sure to contribute as much as you can to get the full match.
  • It's important to educate yourself about investing and learn about rebalancing your portfolio.
  • Index funds are a good bet for long-term investing, but target-date funds may not have the right asset allocation for your goals and are only as good as their fund managers.
  • Don't forget to invest in other vehicles, such as IRAs, collectibles, and a home.

1. Consider Paying for Account Management

There are plenty of financial advisors who would love to manage your retirement account, providing you meet their minimum balance requirements. There are also online services that can help you make good financial choices even if your balance is small. Needless to say, both of these options come at a price.

In general, if you have little investment knowledge, it’s worth getting help from a professional you feel you can trust. Also, some 401(k) plans offer free advice from a professional or might give you model portfolios that you can follow. If you have some knowledge of investments, you may also try to manage your investment portfolio yourself.

You also could choose a combination of a professional manager and a do-it-yourself approach, and there are advisors who will work with you on that basis, too.

2. Contribute the Max for the Match

If your company is matching your contributions up to a certain point, contribute as much as you can until they stop matching the funds. Regardless of the quality of your 401(k) investment options, your company is giving you free money to participate in the program. Never say no to free money.

Once you reach the maximum contribution for the match, you might consider contributing to an IRA to diversify your savings and have more investment choices. Just don't miss out on the match.

3. Learn the Basics of Investing

In order to evaluate different funds in your 401(k)—or to understand what your financial professional is saying—you need a basic knowledge of investing. It also helps to understand terms such as 12B-1 fees, expense ratio, and risk tolerance.

Read through the information sent to you by your plan. If there are terms you don’t know, look them up. (You can start here—Investopedia has more than 14,000 terms in its dictionary).

4. Be Sure to Rebalance

Life is full of routine maintenance, and your 401(k) needs maintenance too. In the investment world, rebalancing is another term for maintenance. As different assets move up or down in value, they become a smaller or larger percentage of your overall portfolio.

Financial advisors suggest having a specific allocation of stocks and bonds. If you’re 40 years old, for example, you might have 80% of your money in stocks and 20% in bonds. If that allocation gets out of balance, you may have to buy or sell assets. 

5. Learn to Love the Index Fund

Some people love the appeal of stock picking. Finding the next Google or Tesla that will return hundreds of percentage points over a relatively short amount of time is thrilling, but according to research, the gamble generally doesn’t work that well.

An index fund simply follows a market index. A fund that follows the S&P 500 rises and falls with that index. There’s no guessing which stock will outperform the market, and the fees you pay for index funds are almost always much cheaper than those for funds that try to pick the next great stock. There’s plenty of research that shows index funds outperform actively managed funds over the long term, too.

A plan geared toward building a nest egg is better suited to allocating large amounts to index funds.

If you fancy yourself a Wall Street trader, do it with money outside your 401(k); it's best not to make short-term decisions with a retirement account.

6. Be Wary of Target Date Funds

Think hard before you simply invest your 401(k) in a target-date fund. The idea of these funds is that they're geared to evolve as you move closer to retirement. If you’re planning to retire in 2035, for example, you would invest in a target-date fund that matures in that year. The fund’s managers will continually re-balance the fund to maintain an appropriate allocation as the target date gets closer.

Here's why this type of fund may not be the best choice. For starters, funds use different allocation strategies, which may or may not be a good match with your goals. As experts point out, a target date fund’s performance is largely based on the fund managers. Since you probably don’t know the good managers from the bad, picking a fund is difficult.

Equally important, fees for these funds are often high, and novice investors don’t understand the golden rule of target-date funds. If you invest in one, you shouldn’t mix it with other investments. Most financial advisors agree that it’s close to an all-or-nothing investment. Investing your 401(k) in other funds as well throws off the allocation.

One-stop shopping is appealing, but just because these vehicles are a simple way to invest doesn’t mean that they're easy to understand or the right place to park your retirement funds.

7. Go Beyond Your 401(k)

Your 401(k) should be one of several retirement vehicles that you have. Your home, a side business, collectibles, and other investment accounts such as an IRA might also be part of your mix.

When you switch jobs, consider whether it makes more sense to roll over your previous company's 401(k) into your new employer's plan or into an IRA. The IRA may give you more investment choices. Spread your assets over multiple income streams and you’ll likely see better returns.

Can I Manage My Own 401(k)?

Yes, in the sense that you are often responsible for choosing from the among the investment options offered in your company's 401(k) plan. These are usually a selection of mutual funds and ETFs, and may also include company stock. You cannot, however, invest in securities not offered by the plan, which means you cannot usually pick single stocks or bonds.

Do I Need a Financial Advisor to Manage My 401(k) Plan?

If you already have a personal financial advisor, they can probably advise you on how to invest your 401(k) contributions. Several employer 401(k) plans also have financial advisors on-call to help plan participants. Whether or not you need to consult a financial advisor will depend on your financial literacy, comfort, and cost-sensitivity (since advisors will often charge a fee).

Where Should I Put My 401(k) Money?

Most experts agree that a well-diversified portfolio that corresponds with your risk tolerance and time horizon is the best strategy. If you are younger and have a longer time until retirement, you can put more into stock funds and less into bond funds, for instance 85:15 stocks-to-bonds. As you get closer to retirement, you should probably shift to a more conservative weighting, perhaps 60:40. If your company offers company stock in your 401(k) it is recommended to put no more than 10% into that portion. A target-date fund can be a good idea for those who want diversification that automatically rebalances over time, so you can just set it and forget it.

The Bottom Line

Regardless of your age, you have to take an active role in your retirement planning. Sometimes that’s as easy as monitoring your investments after exhaustively researching your options. Other times, it might mean working with a trusted financial adviser to set long-range goals.

Retirement will sneak up on you faster than you think. Whether you’re just starting your career or quickly coming up on retirement age, make retirement planning a top priority—and keep it that way throughout your life.

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