5 Ways to Evaluate Your 401(k)
By: Source: AARP Bulletin Today Date Posted: 2003-06-30 15:57:20
Investing in a 401(k) is a great way to save for retirement. You get immediate tax savings on invested money, and you defer paying taxes on savings until retirement. What's more, employer contributions to your retirement account are the closest thing to cash falling off the proverbial money tree.
But it's easy to put your 401(k) in cruise control, allowing automatic deductions from your paycheck and matching contributions from your company to flow into your 401(k) account. You can lose track of your account's changing asset balance, and it's easy to overlook administrative costs and errors.
The next time your 401(k) statement arrives—usually on a monthly or quarterly basis—perform this 5-point checkup:
1. Make sure your 401(k) investment choices sync up with your retirement goals. Gone are the days when you could just direct all 401(k) contributions to aggressive equity funds and daydream about retirement. At your age, you should be reallocating or rebalancing your portfolio annually. "When you're 50, you have to begin to manage the plan more actively," says David Wray, president of the Profit Sharing/401(k) Council of America. Ask yourself the questions you've been putting off: When will I retire? What standard of living do I want? How healthy do I expect to be? Then refine your savings goal as necessary, and make sure your investment choices offer the right balance of risk and reward to achieve those goals.
The average 401(k) plan offers 11 investment choices, says Rick Meigs, president of 401kHelpCenter.com. An emerging option for those befuddled by choice is a program like Fidelity's Life Stage Program, which automatically allocates your funds based on age, saving you from sweating investment choices. Want more choice? Look for programs such as Schwab's Personal Choice Retirement Account, which allows savvy investors to establish hand-picked portfolios from a wide range of fund and individual company offerings.
2. Limit your investment in any single company—including your own company—to no more than 10% to 20% of your 401(k) plan. A diverse portfolio is crucial as you near retirement, because you don't have the luxury of time to make up funds lost via the collapse of a single company. "This whole Enron debacle could have been avoided if people just diversified," says Scott Kays, an Atlanta-based certified financial planner.
3. Limit your investment in any single investment category—healthcare, technology, financial services, and so on—to no more than 20% of your 401(k) plan. In particular, don't be guilty of loading up your portfolio to capitalize on a hot sector. "Once it's hot, it's probably too late," says Kays.
4. Watch out for administrative costs that can eat into your retirement savings. You may not know it, but many plans—or, more specifically, the individual funds within the plans—assess small fees to cover marketing and overhead costs. "You should be scratching your head," American Association of Individual Investors' President John Markese says, if you're paying anything higher than 1% of your portfolio's value in costs each year. If your 401(k) statement doesn't spell out these costs for you, call the plan's customer-service reps to get the answer.
5. Check for errors. Did all your paycheck deductions actually make it into your 401(k) plan—and into the right places there? If you have taken a loan from your 401(k) account, is the outstanding loan balance correct? The U.S. Department of Labor reveals that "an anti-fraud campaign by the Department uncovered a small fraction of employers who abused employee contributions by either using the money for corporate purposes or holding on to the money too long." (Check out the DOL's website for 10 warning signs of misuse of your 401(k) contributions.)
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