How to Get the Most Out of Your 401(k) Plan
If you are enrolled and actively participating in a 401(k) retirement plan at your place of employment, congratulations! This is one of the best things individuals can do to help prepare for a financially secure retirement.
However, not every employee who is signed up for a 401(k) plan at work is getting maximum benefit out of his or her plan. “There’s a big difference between just participating in a 401(k) and maximizing the potential benefits a plan has to offer,” says David Lerner Associates Executive Vice President Martin Walcoe. Here are five tips for getting the most possible bang from your 401(k) bucks:
1. Create an overall retirement investing plan. “If you don’t know where you’re going, any road will get you there.” This saying holds especially true when it comes to planning for a financially secure retirement.
“Before signing up for a 401(k) plan, most individuals should devise a comprehensive retirement investing plan to help guide their investment choices,” says Walcoe. This plan should specify things like your investment time horizon, level of risk tolerance, income goals during retirement, and whether or not your spouse is also contributing to a retirement plan (and if so, how much).
2. Your account contributions are automatic. 401(k) plans allow participants to automate their contributions by having a set amount of money automatically transferred from their paycheck into their 401(k) account each pay period. “This is essentially ‘paying yourself first,’” says Walcoe. “When your contributions are automated like this, you’re not as tempted to spend the money on something other than your retirement savings.”
3. Rebalance your investments and increase your contribution amount periodically. One of the potential drawbacks of automatic contributions, however, is that individuals sometimes just put their 401(k) plan on ‘cruise control.’ “A 401(k) plan isn’t something most people should just sign up for and forget about,” says Walcoe.
For example, Walcoe suggests that participants periodically assess their asset allocation — or their mix of investments between stocks, bonds and cash equivalents — and rebalance their account, as necessary, in order to keep their allocation in line with their long-term objectives. “Also consider increasing the amount you contribute when the opportunity presents itself, such as when you receive a raise.” For 2013 and 2014, employees under age 50 may contribute up to $17,500 to their 401(k) plan, while employees age 50 and over may contribute up to $23,000.
4. Choose your investment funds carefully. 401(k) plans are required to offer participants a choice of different investment funds to choose from so they can create the right asset allocation mix for them. If a participant doesn’t choose any funds, many plans will place the contributions into a default investment option, such as a target-date fund.
Walcoe recommends that participants take the time to carefully investigate the fund options available to them and then actively choose the ones they believe will help them meet their retirement savings objectives. “If you don’t think you’re qualified to do this, seek out an investment advisor who can help you.”
5. Take full advantage of your plan’s features. Many 401(k) plans offer a variety of useful features that some participants often aren’t even aware of, much less taking advantage of. These may include access to financial and investment advisors who can help them choose the right funds; retirement planning resources like financial articles, calculators and seminars; and automatic contribution increases and rebalancing.
“Signing up for your employer’s 401(k) plan is a good start toward retirement financial security, but it’s just a start,” says Walcoe. “Taking steps like the ones mentioned here can help you maximize the potential benefits of your plan.”
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
There are risks inherent in investing.
Many 401(k) programs offer mutual funds. Mutual funds are offered by prospectus. Investors should read the prospectuses carefully and consider the investment objectives, risks, charges, expenses and other information before investing.
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