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Is Your 401(k) Completely Bulletproof?


“Take advantages of company matches, of course, but also ask about true-ups.”

There’s a lot of bad press about workplace retirement plans and particularly about the fees.  However, to be perfectly blunt, 401(k) plans have been a great help to millions of working Americans. In total, 55 million of us own $5.3 trillion in these accounts, according to industry data. Put simply, 401(k)s work—they get people to save for retirement.

That’s the good news, according to an article from MarketWatch, “All the ways you can mess up your 401(k)—even if you max out your contributions.”  The bad news? People who are diligent and organized, still make mistakes with their 401(k)s. They often leave money on the table. That includes good savers, who are making the maximum contributions.

If you care about making the most out of your 401(k) plan, here are some points to watch for:

Not Investing. Even with automatic enrollment in place, would you believe as many as 80-90% of those participating in a 401(k) leave their contributions in cash? True. The problem? Cash is subject to inflation and steadily loses value. Stocks and bonds may go up and down.  However, they traditionally will grow more than inflation.

Turning down free money. Many companies incentivize savings, by offering to match contributions by a percentage of their employee’s salary match or a specific amount. Not making the most of that match is saying “No, thanks” to free money.

Missing company matches by front-loading contributions. This is more commonly seen in aggressive savers, who try to max out their contributions as quickly as possible every year.  However, zero contributions in later pay periods risks not getting all the possible contributions. Ask your employer how you might spread out payments over the course of the year. Talk with your HR department to be clear  about your company’s match plan details.

Paying high fees. Most companies watch the fees, before signing up with a 401(k) provider.  However, you can advocate for yourself, if your company’s choice seems to have high fees. Choose low-cost index funds over expensive active mutual funds. According to BrightScope, almost all plans have access to index funds.  However, only about a third of total plan assets are invested in low-cost funds.

Timing the market. Here’s what typically happens: people ignore their accounts for years at a time and then one day they open their statement to find there’s a LOT of money in their accounts! It’s more a result of the power of time, known as compounding in investment circles, than of their investing skills. The problem is, the method that worked—a risk-adjusted portfolio over time—makes them think it’s time to micromanage their accounts. Stick with what’s worked and let the power of compounding do its job.  You will find that you will do better.

Abandoning accounts. Leaving one job and opening up a new 401(k), results in many people forgetting to move their old 401(k). Fees can take their toll over time and a once robust account can be depleted.

When you have too many accounts, it can be difficult to manage them wisely. You end up with  many accounts, with funds in the wrong kinds of investments. What was appropriate in your thirties, is wrong for your early 60s. Roll those old balances into a single IRA and you’ll be able to have a clearer vision of how your portfolio is balanced or how it isn’t.

No matter what stage of life you’re in, it is wise to make time to keep an eye on how your money is managed. When retirement comes around, you’ll be glad that you did.

Reference: MarketWatch (May 5, 2018) “All the ways you can mess up your 401(k)—even if you max out your contributions.”

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