For many, a 401k account is an important part of their comprehensive financial plan. Since employers usually sponsor 401k plans, it can be easy to "set it and forget it"... but like any other retirement plan, 401k plans require regular evaluation to ensure they're working hard for you.
Our retirement plan advisors share tips on evaluating your 401k.
Financial Strategies: Always Know What You're Paying in Fees
How much are you paying in 401k fees? If you don't know the answer, you're not alone; because these investment costs don't come directly out of your pocket, it can be easy to overlook fees. But the expenses associated with your retirement account — such as plan administration, investment, and individual service fees — may significantly reduce your returns.
While the difference between 1 percent and 2 percent in fees may not seem like much, over the years, higher fees may result in thousands of dollars less waiting for you when you retire. Your 401(k) plan administrator is required to provide this information to you, so do a bit of research to ensure you're not reducing your return unnecessarily. When reviewing your plan, keep these questions in mind:
- Which options does your 401k offer?
- Do you have access to complete information about your investment choices and how much each option costs?
- Does your 401k plan offer any investment education?
- Are you being charged for commissions/loads?
- Are you being charged account fees? Transaction Fees? Fund Fees?
- Does your employer help to pay administration costs?
- Are your investments tracking a market index or being actively managed?
- Are your returns being evaluated relative to an appropriate benchmark?
Determining how much you're paying in fees will help you make informed retirement planning decisions.
Know Your Options: Which Retirement Accounts Fit Your Wealth Planning Goals?
Now review the investing options available through your 401k plan. Choosing low-cost index funds may reduce the costs and fees associated with your account. Look for plans that are diversified across multiple asset classes. If the available options don't meet your needs, you can ask your plan administrator to include better offerings.
What if there just aren't any appropriate, low-cost options that meet your individual needs and goals? You may want to consider moving some of your money into an individual retirement account or IRA that allows you the freedom to choose to invest in low-cost index funds. If this option makes sense, you should still take advantage of any employer match program offered. Consider contributing enough to obtain the maximum match from your employer, then contributing the rest of your retirement savings funds to an IRA.
Turning down employer matching funds is, essentially, turning down free money, so there's no reason to pass it up. But there's also no reason to continue investing the lion's share of your retirement savings in a less-than-optimal 401k. Regular meetings with your retirement planning advisor can help you evaluate your 401k and keep your nest egg on track.