How to Improve Your 401 (K)
Investing for retirement is important and 401 (k) offers some of the best perks to get workers to invest first. But what happens when your employer’s plan doesn’t give you the investment options you want?
This is what Stephen M is struggling with .. He sent this letter:
Have you written an article on how to invest in 401 (k) jobs and matches, basically how to navigate and research existing funds in plan and create the best diversified portfolio for a situation where you can with limited options?
This is of course worse than any other investment because no matter where I worked it was tied to about 20 funds and almost all of them will have an expense ratio of 1.0% and will not be the same overall as I would choose if I had my own choice. … Also, some jobs will correspond to the stock of the company rather than the actual stock purchased as a result of someone else’s investment choices ?.
I helped a friend with her finances and many of those 401 (k) in the workplace will have a default subscription that will start at two to four percent and will increase by one percent per year, regardless of the percentage the job gives. …
On top of that, he also signed it to a proposed actively managed, time-bound plan that had a much higher expense ratio than the other index offerings in the plan.
In her case, since she has a high int. credit card debt, I found that her one percent annual increase brought her to six percent, while her job was only four percent. In this case, it obviously made sense to lower it to four percent at the appropriate level and use the additional two percent to pay off the credit card debt / increase cash flow.
How to increase your 401 (k)
You’ve identified one of the most common complaints about 401 (k) s jobs: they have limited options that, depending on where you work and who your fund manager is, can be quite expensive. If you are unhappy with what is being offered – and you have done the job to find that you have a high level of spending – then it makes sense to do your part to meet employer requirements and then expand.
Typically, I would say I will do my part for employer compliance and then look at a traditional IRA or Roth IRA. But if your friend really has a lot of debt (probably with an interest rate of 17 percent or higher), paying it off in the first place makes much more sense. While paying off the debt, she may consider other investment options. If you’re interested in learning more about this reasoning, I’ve outlined the order in which I prioritize financial goals.
Regarding your first question, there are many tools that will analyze the funds your company is offering. One easy way: Search for a fund’s ticker on Yahoo Finance or Morningstar and you’ll get a breakdown of the companies included in it. You can also inquire about the fund on its company’s website. So, for example, if you are offered FUSEX or Fidelity 500 Index Investor, connect it to the Fidelity website and it will tell you everything you need to know.
Another frequently recommended site is Brightscope, which allows you to research and analyze your funds. Alternatively, you can search by fund name and prospectus and you will get a breakdown by holdings. The account statement must also indicate the funds in which you have invested. Alternatively, look at which magazines like Kiplinger recommend each year and compare with what your employer has to offer.
Until the scheduled date or not before the scheduled date
I already wrote about the shortfalls in date-bound funds that you also noted – a potentially higher expense ratio. Target date is not the worst option in the world, especially for novice investors, but if there are other comparable options for the index that are offered at a cheaper rate, then it makes sense to use them. Personally, I find the target dates that I have been offered are too conservative, but that will depend on your risk tolerance. Just note that choosing your own funds means that you will be responsible for rebalancing and tracking the cost / performance ratios for each fund, etc., that target dates are set automatically.
In terms of diversification , one or two broad market index funds should help. You can advise your friend to try a portfolio of three funds, or at least have a mix of local stocks, international stocks (sometimes this can be combined with a “whole world” stock fund), and bonds. You can use this Asset Allocation Calculator if you are unsure of what to do.
If your plan does not offer such funds, you will have to do everything you can to bring them closer . As described earlier in Lifehacker , you can combine:
- S&P 500 Fund (which includes the 500 largest US companies)
- Mid-cap index fund (which includes mid-size companies that compensate mid-size companies not included in the S&P 500).
- Small-cap Index Fund (which includes smaller companies that offset smaller companies not in the S&P 500).
Your 401 (k) should offer you at least these options. If this is not the case, remember that you can contribute up to the match with the employer and then open an account elsewhere. Here’s how it can shake out :
- Submit just enough 401k to reap the benefits of matching with an employer.
- Bring any additional savings to an IRA that has more flexibility.
- If you still have money after maxing out your IRA (you can see the limits here ) then go ahead and put it in your 401k.
- If you run out of your 401k and your IRA as much as possible (wow, good for you), you can open a regular taxable investment account. These accounts are also suitable for more medium-term purposes, as retirement accounts do not allow withdrawals until a later age.
Invest in the cheapest (quality) funds your 401 (k) has to offer and then gain wide diversification in your IRA.
If you are truly unhappy with your 401 (k) options, it is worth contacting management or Social Security. They may not take any action, but you may find that you are not the only employee who disagrees with what is being proposed (and if you are a union member, you should tell your representatives). If you are married and your spouse has a better retirement plan than you, consider transferring more of your assets to theirs.
Finally, don’t forget that your 401 (k) offers tax breaks that can outweigh the potentially high costs. You can deposit $ 19,000 this year ( $ 25,000 if you’re 50 or older), well above the $ 6,000 limit set by the IRA. And as Money Magazine points out , you can always transfer your balance to a new, potentially more economical account when you get a new job, but only if you’ve contributed to it.