With the decline in defined benefit plans (employer paid pension plans), responsibility has shifted to individual investors for saving, allocating and monitoring our own retirement plans. The most recognizable type of retirement plan is the 401k. This plan gets it’s name from the tax code that created these plans.
General rules for 401k’s
- Save as much as you can given your situation, but ALWAYS save enough to get the company match.
- Don’t take a loan from your 401k! Loans are a unique option that 401k’s allow and are made even more enticing by a so called interest payment to yourself. Don’t do it! 401k’s and retirement plans are just that retirement plans and we rarely see a situation that a loan is the correct action.
- Invest aggressively when beginning a 401k. Yes you heard it correct, we said aggressively. When you first begin a new 401k plan your contributions are the main source of funds for the account. For the first several years your contribution will greatly overshadow any investment results you may make. As your contributions make up a smaller and smaller portion of the total account you should monitor and make sure your allocations closely fit your risk profile.
- Don’t leave a 401k at an old employer. Due to the fact that most 401k’s and any other company offered retirement plans have many participants, plan investment options are limited a best. Rolling a 401k into a self directed IRA gives an investor the freedom to choose from thousands of investment options and helps investors begin understanding the responsibility they have for their remaining investment years. As a side note many 401k plans are expensive for companies to maintain and many companies pass this expense on, rightfully so, to the participants. Many times costs are not easily determined by participants.
- Reallocate your 401k annually at least, more frequently if necessary. Many studies have shown investors inadvertently ignore their 401k. We think it’s a function of many investors feeling a lack of control due to the company defined options and many times for younger investors, a very long term horizon. Don’t let this happen to you, your 401k is a very valuable part of your investment portfolio and deserves equal investment attention by each participant.
In closing, if in doubt, and you are forced to make a quick decision in your 401k plan, make sure you are saving as much as possible, you can make allocation adjustments in the future, just be sure to become a participant in the plan.