When Was The Last Time You Actually Read Your 401(k) Statement?
Has it been awhile? If you’re like most people it has been a long time since you really looked at your quarterly statement. Sure, you probably opened the letter and checked out the balance before throwing it in the trash. Or maybe you saw the email but then just hit delete to clear out your inbox. Your retirement savings is one of your largest assets, and for some, maybe even the largest. It’s important to keep tabs on what going on with it.
So how can you get reacquainted? Here are some tips to help get you back on a first name basis with your retirement account:
Act Your Age
In the good ol’ days of the 1980s and 1990s we could put our investments into just about any random combination of investments and expect them to go up, and only up. Unfortunately, the realty of the age we currently live in is not so simple. The mix of investment choices we make, also called Asset Allocation, importance becomes much more apparent. In fact studies have consistently shown that Asset Allocation is the most important determinate of investment return, beating out market timing and investment selection. Something that hasn’t changed is the importance of Asset Allocation, it
. was true in the good ol’ days, and it is still true today. Your Asset Allocation needs to match your age, your projected time to retirement, and your ability to handle risk and market volatility. Your retirement plan provider should have some quick and easy online tools that you can use to help determine a good asset allocation for you. If you work with a Financial Advisor even better, he or she can help provide guidance and help incorporate your work retirement plan assets with the rest of your investments so you have an integrated investment plan.
Understand Your Return
Your retirement plan provider should give you information on how your account is performing. Make sure this number indicates the actual gain you are getting from your investments. Your account balance will change based upon a number of different factors; your contribution, your employer’s matching contribution, profiting sharing contribution, plus the actual gain or loss your investments deliver. Obviously if the Return Performance is including what you and your employer put into your account, your returns will be skewed. To really understand how you are doing you need to understand the true rate of return.
Understand Your Costs
As the saying goes, nothing is life is free – and company sponsored 401(k) plans are no different. New rules for retirement plans finally went into effect this year designed to help demystify the actually costs to you, the participant, of participating in your employer sponsored retirement plans. By now you should have received your first statement that detailed these costs. After review, if the fees seem too high it may be time to make some changes. Maybe it is time for your employer to change providers or negotiate a better fee agreement. But even if a company-wide change is not an option, there are things you can do on an individual basis. With your handy new Asset Allocation you developed (see above) examine the options you are investing in for each part of your allocation. Often plans will have several similar options and there may be differences in the cost with each option. For example, you could change to a lower cost S&P500 index fund over an actively managed large cap mutual fund. This would give you exposure to the same part of the market, particularly if the track record of the active manager has been no better than the index fund, and potentially save you money with lower fees. It may not seem like much, but every bit of cost savings goes into your pocket and can directly impact your bottom line.
Also, if you have switched jobs and have an old 401(k) still active with your former employer, it may be worthwhile to roll it into your new plan, or to a rollover IRA to save costs.
Your employer’s contributions to your account usually come with a vesting schedule. A vesting schedule tells you what percentages of your Employer’s contributions are yours at the end of each year of service. From this you can tell how much your employer could take back if you are no longer employed with them if you stay with the employer, this vesting schedule has little bearing, but if you are considering leaving for a new company you could lose out on thousands if you’re not 100% vested. It’s important to know exactly how much you will leave on the table when you decide whether that new job is worth it or not.
I would recommend against taking loans against your retirement assets for many reasons, one of which is being caught needing to pay it back. It may seem like a low-risk, low-cost option, but if you are no longer employed with your current employer, for whatever reason, these loans come due in full, immediately. That nice easy payment schedule that you have coming out of your paycheck goes out the window. Failure to immediately repay the loan with make the IRS consider it an early withdrawal which will bring on income tax on the outstanding amount as well as a 10% early withdrawal penalty payment.
Remember that ultimately this is your money and you are responsible for it and your own retirement. You may feel like you’re behind, but it is not too late. Start taking the first steps to make a noticeable difference in your future. Sit down with the advisor on your 401(K) plan or seek out your own outside Investment Advisor. A few hours spent a few times a year can go a long way to making a big change.
Eric is an Investment Advisor Representative and Principal with Berls Asset Management He specializes in helping individuals and businesses with retirement and financial planning. Berls Asset Management is a fee only Registered Investment Advisor registered with the State of Illinois. The firm is not a broker/dealer and as such it does not take commissions, 3rd party payments, or any other compensation from anyone but our clients. This puts Berls Asset Management on the same side of the table as the clients it serves. The firm is independent, owned by its employees, and has no outside forces dictating how it best serves its clients or what solutions we provide.
The firm operates with one underlying objective; to work with a select group of clients to develop very specific goals for the attainment and protection of wealth.
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