9 Things You Should Know About Your 401k

Finding time to review and monitor your 401(k) is often hard to do with all that life throws at us on a day-to-day basis. However failing to do so can cost you dearly. For many, the 401(k) is the one of the largest asset they will own in their lifetime and everyone deserves to have a “lean mean muscle machine” of a plan!

Hopefully the following will increase your awareness to some important elements and to facilitate better 401(k) decisions.

1- Contributing enough each pay period to get the full company match is a smart decision in every case. Besides the income tax savings on 401(k) contributions, many companies also provide a match. This is like free money and it’s important that at the very minimum you contribute enough to max out this added bonus.

2- Knowing the expected rate of annual return of your 401(k) portfolio is essential to be able to determine you will have adequate retirement income. Unfortunately, few plans provide an annual analysis to tell you the expected return and fewer participants know how to figure it out.

3- Know the expected range of returns of your 401(k) portfolio. For any group of investments, the normal expected range of returns that can occur each year can be calculated and forecast. Its important to knows this so than in a down market you are not caught off guard by having more risk in your portfolio than you can afford to take.

4- Rebalance your portfolio at least annually. Having the right mix of different types of investments is the best way to minimize risk. As a result it’s important to rebalance back to the proper allocation as market changes occur. Rebalancing annually is probably adequate in most cases.

5- Be aware of the fees that are associated with your account and determine that they are reasonable. High-fees are a prime cause for poor performance. If you work for a larger employer there is a good chance that your plan has been benchmarked and can be viewed on line at Brightscope. Hopefully your company has below average fees. Above average fees can hurt your future retirement income.

6- Having a diversity of funds in your plan from the multitude of asset classes is important to be able to design an appropriate portfolio and is mandated by ERISA. Brightscope can evaluate this for you as well.

7- Participants, regardless of how much investment education they receive, will not be able to design a portfolio as well as an unbiased professional. Unfortunately, the majority of plans are sold by salesmen who often direct investments into funds that make them more money. A registered investment Advisor or Investment Fiduciary does not. There is a proven advantage to having model portfolios professionally designed for participants to utilize.

8- The mix of investments in your 401(k) should be designed to provide the maximum return for the level of risk taken. Unfortunately, very few plan participants can determine this and most investment or insurance companies do not provide this either. Plans with Investment Fiduciaries do provide this expertise.

9- Are you contributing enough to reach your retirement income goal? Unfortunately the answer for most people is no they are not but they do not know this. One way to know if you are on track is to have an annual retirement income analysis completed. This information would indicate if your current plan along with future contributions will provide the income you plan on having when you retire. After all that is the purpose of the 401(k) in the first place.

If you do not know the answers to the above regarding your 401(k) ask your plan sponsor to provide the information or ask them to hire an Investment Fiduciary to help you and the other participants. After all it is the plan sponsors ERISA duty to run the plan on your behalf.

About the author

Michael Chamberlain, CFP®

Hello. My name is Michael Chamberlain CFP®, the principal of Chamberlain Financial Planning and Wealth Management. Our firm is “fee-only” with offices in Sacramento, Campbell and Santa Cruz California. “Serving clients from the mountains to the sea.”

Our mission is to help clients realize their full potential today while planning for an abundant tomorrow through comprehensive financial planning and collaborative decision-making.

As an experienced investment and planning professional, I have had the privilege of being interviewed by and contributing to hundreds of articles in such publications as Money Magazine, Financial Planning Magazine, ABC.com, Forbes.com, Nerdwallet, NASDAQ.com, Yahoo Finance and more.

I hope that you spend some time at the FiGuide site and learn more about the financial matters important to you. To learn more about our firm, visit our website www.chamberlainfp.com or give us a call at 800-347-1340.

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