The weather outside is getting warmer which means countless people will be gearing up for some spring cleaning. But beyond cleaning out your cupboards, it's likely your 401 (K) could also use an update. After all, lots of people set their investments in their 401 (K) and forget about it. But that can end up costing them money. From fees to contributions, here’s a look at two spring cleaning moves that can save you money.
When it comes to 401 (K) plans lots of participants give little thought to how much they are paying in fees. In fact, according to a now famous AARP survey of 401 (K) participants, 71% weren’t aware they were paying any fees. But there are a lot of fees associated with 401 (K) plans including administration fees, investment fees, individual services fees, commissions and management fees to name a few. Those funds that are actively managed tend to charge more in fees than those that are passive because they have the costs associated with the salaries of the fund manager or managers. Don’t think fees are a big deal? According to the U.S. Department of Labor, an employee with 35 years until retirement with a 401 (K) account balance of $25,000 will see that grow to $227,000 at retirement, assuming 7% returns and expenses that reduced that by 0.5%. If the fees were 1.5%, the balance would only be $163,000 in retirement.
Employers want their employees to save for retirement and will sometimes go to great lengths to entice them to save. One common bribe: the company match. In essence, a company agrees to match a percentage of an employee’s contributions, commonly up to 6%. But if you aren’t investing any money in your 401 (K) or contributing at least 6% to it, then you are leaving free money on the table. And over time that free money, thanks to the beauty of compounding, can be a lot. Financial Engines estimates U.S. workers leave $24 billion in unclaimed 401(k) company matches on the table every year with the typical worker losing out on $1,336 per year. (Read more, here: How 401 (K) Matching Works.)
Many will start contributing to their company-sponsored 401(K) as soon as they can and as a result tend to have a more aggressive asset allocation focused heavily on stocks. That's fine when you are young, but as you get older, your needs change. Because of that, it’s a good idea to look at your asset allocation on a regular basis. It doesn't have to be included in every spring 401(K) it should be done at least when big life events happen such as a wedding or marriage. It's particularly true the closer you are to retirement. An asset allocation where 85% is in stock may make sense at 30 but not at 60. If you find your asset allocation is out of whack, realign your investments with current financial goals and objectives. (Read more, here: Achieving Optimal Asset Allocation.)
One of the byproducts of this global, technology-driven economy is people don’t stay at their jobs for long and often when they leave for greener pastures, they abandon their old 401 (K). According to the Retirement Clearinghouse, roughly 10 million people with 401 (K) plans switch jobs each year and about 25% don’t take their 401 (K) with them. While figuring out where old plans are can require some detective work, it could save you money in unnecessary fees and overlapping investments if you have multiple 401 (K) plans at former employers. Once you locate your former 401(K) plan you have a few options: do nothing and leave it with your old employer, roll it into your current 401 (K) or move into another tax advantage retirement savings plan like an IRA. (Read more, here: What Are The Difference Between A 401 (K) And An IRA? )
Company sponsored 401 (K) plans are an important vehicle to save for retirement yet many workers worry more about getting the windows sparkling for the warmer months than making sure their 401 (K) is in order. However, overhauling the fees you pay, making sure you have the right contribution level and that your asset allocation matches your objectives are easy ways to fine tune your retirement portfolio and save some money along the way.