The Ultimate Guide to Getting More from Your 401k Plan

Retirement. Cruising in the Greek Islands? Taking the grandkids on holiday? Going out to that world famous restaurant? Having THAT round of golf? Can’t wait? Me neither. A secure retirement, yes please. Money to have fun with when all the hard work has been done? Absolutely.

So getting your 401k kicking in all the right places today will give you a life that you deserve in retirement. Decisions that you make now (or, gulp, have already made) could cost you tens even hundreds of thousands of dollars in your golden years.

Let’s get down to it; 13 tips you really, really should think about when it comes to your 401k account. Otherwise known as the ULTIMATE GUIDE TO GETTING MORE FROM YOUR 401K PLAN !

Tip 1 - Free money!

Got your attention? Thought so. When you hear the words “matching contributions” from your employer, prick your ears up, it is, literally, free money. And you should get as much of it as you possibly can. Picture that palm fringed beach, the cocktail and the lounger, this could make the difference, so remember ...

Every company is different, but most--if not all--will match your contributions. Ask. Find out what your company's program is and find out how to maximize it. For example, many employers will match the first 4-6% of your 401k contributions, so that is a good place to start.

Tip 2 - Know thy fees.

When looking at your investment options--typically mutual funds--keep a close eye on the fund’s expense ratio. This is a fee that every mutual fund charges you (the investor), and it’s expressed as a percentage of the amount you have in the fund. For example, Fidelity Contrafund (FCNTX)--a popular fund that makes an appearance in many 401k plans--has an expense ratio of 0.64%. If an investor has $100,000 in that fund, it will cost them $640 annually.

Now just think, $640 annually, for 25 years, taken away from your personal nest egg (the nerve!). You may think it’s just $640 * 25 years, which is $16,000. But it’s actually much, much worse. Money lost to fees is gone forever and can’t enjoy the power of compounding.

What is the true cost? Assuming a 7% return, it’s actually a little more than $80,000 difference in end wealth (that is, you’d have $80,000 more money at the end of 25 years by not paying 0.64% in fund fees every year).

For a handy article we wrote with tips on how to very easily find a fund’s expense ratio.

Tip 3 - Make sure that you rebalance.

First question. What is rebalancing?

Rebalancing involves making sure that your portfolio stays lined up with your target asset mix. Different asset classes have different risk / reward profiles so you want make sure your portfolio mix matches your goal and risk profile. Rebalancing is a fundamental aspect of long-term investing.

Say your target asset mix is 60% stocks, 30% bonds and 10% cash. Once a year you should sell just enough of the funds that grow fastest (lately, stocks)— and add enough to the laggards (cash and bonds)—to restore your target mix. This strategy means you buy low and sell high over time while maintaining the target risk profile for your portfolio.

For example, two years ago, stocks rose 32% and bonds fell 9%. The prudent move would have been to sell some stocks and buy some bonds. You would have benefited from the bond market’s rally last year. Stocks also rose last year by 13.7%. Without rebalancing, you will end up with more exposure to stocks that you intended.

A recent study by Aon Hewitt found only 15% of 401(k) savers did any sort of rebalancing last year. This is one of the lowest rates on record. Some 401k plans have a feature called "automatic rebalancing." If your plan offers this then sign up. Your 401k will then be automatically rebalanced on a schedule to maintain your target investment allocation. Easy.

Tip 4 - Your 401k is actually for your retirement.

However tempting it is to use the money that apparently is just sitting there to buy that new car, or to put that extension on your house ...don’t. This is money that you will need in the future. Not only that, withdrawing $10,000 today might mean $100,000 (or more) less for your retirement. Think long and hard before you touch this nest egg.

Have a look at this cool little retirement calculator from MarketWatch which looks at your age/income/retirement age to see how much you will REALLY have … simple and brutally effective

Tip 5 - What. Is. Vesting?

Something you should know about especially if you like to move about and change jobs. Basically a company vesting schedule is how long you have to work for them before you can claim the full amount the company matches. So before you decide ... should I stay or should I go, make sure you do the math, and make an educated decision.

Tip 6 - What is a Roth 401k ?

We are talking about tax here. Stick with a 401k and you get the tax benefits immediately. That is, your 401k contributions are made with pre-tax money. BUT the tax man always cometh. When you retire and take 401k plan withdrawals, it will be taxed at your ordinary income tax rate, which can be rather lofty as you move up the income ladder.

Alternatively, with a Roth 401k plan, you can pay the taxes up front and then take your withdrawals tax-free in retirement. Whether you pay taxes now or later depends on a number of factors, including your earnings potential, age, and your assumptions for future tax rates. That new Audi in retirement is a reality if you ask your personal advisor to help you to optimise for your personal situation.

Tip 7 - Do the research.

How much time do you spend figuring out what new phone to buy? Or which resort to stay in on vacation, or for that matter, the best flights to get you there. If you are anything like me, plenty.

So why on earth do we not spend the same amount of time researching how we can have enough money to do the same things — but in our retirement?

Be wary of Target-date funds. They are popular because they are easy and have a “set it and forget it” strategy. However, these funds take a one-size-fits-all funds approach which may not be the best route for your personal situation.

A great place to start your research is Morningstar. They offer lots of useful tools, calculators and articles to learn more about your investment options.

Tip 8 - Good Advice will pay for itself in spades.

Good advice early on–well before retirement–can really make a big difference over the long-haul. For example, choosing inexpensive index funds instead of actively managed funds in your 401k can save you around 1% a year in fees. Understanding the amount of risk in your 401k portfolio is also valuable–too much risk and your emotions may get the best of you during a market correction, too many ultra-safe assets (too little risk) and you may not reach your retirement goals.

Nearly half of all employers offer free in house advice, so if you can, use that. If not find yourself a good financial adviser who understands you, your risk levels and your goals.

Tip 9 - Suddenly realized that you won’t have enough money for your retirement? It’s not too late.

If it looks like you might not be able to afford that holiday home retirement gift to yourself, you can do something about it. Check out the catch up provision once you hit 50. This means that on top of the max $18,000 you can pay an additional $6,000 annually. Over 10 years that is $60,000, can you picture that lake front cabin now? Stash that cash.

Tip 10 - Stay Informed.

Your 401k is not something to sign up for and forget. HR will keep you informed about any important changes, so best thing is to read those emails. Investment options can and do change (typically too often, in our opinion), so be sure to re-evaluate any new options that are offered. On the flip side, some investment options get removed, and you need to be sure the fund that is replaced still makes sense for your overall investment objectives (typically, you will be “automatically mapped” to the new fund, which may or may not make sense for you).

Tip 11 - Changing jobs? Don’t cash out.

Cashing out when you change jobs is like using 401k as temporary savings fund. Which it isn’t. $14,000 today could be worth more than $150,000 in your retirement fund in 30 years. So find somewhere else to get that $14k!

Check out what the damage is for that early cash out on either of these two calculators – Money Zine and WellsFargo.

Tip 12 - Roll with it.

Got a new job? That new gig may be exciting and lots to learn, but don’t forget about your old 401k. You worked hard to grow it, don’t abandon it.

Roll your old 401k into an IRA account, where you can have much more control over your investment choices. With the typical time spent at a job hovering under 5 years these days, chances are it won’t be your last 401k rollover to an IRA. You can keep pooling them into the same IRA account, which makes managing the investments easier.

If someone tells you that you have to cash out when you change jobs … you don’t and don’t even think about it. It could incur costly penalties and taxes. Remember, it IS your choice, you can leave your investments in your former employer’s plan or not, it is entirely up to you. More on this in our next tip ….

Tip 13 - Or don’t roll with it.

As usual there are two sides to every story, and of course you always need to think these things through. If you are happy with your former employer’s investment choices in the 401k plan, or they offer access to funds that are unavailable to you outside your 401k, then it may make sense to leave it there. For example, due to their sizable overall assets, many 401k plans have access to “institutional share class” mutual funds, which have much lower expense ratios (see Tip 2 above)–sometimes half the cost of their retail counterparts. Moreover, many 401k plans offer mutual funds from Dimensional Fund Advisors (DFA), which are top-notch funds that are not available to retail investors.

SO. In a nutshell, what are we saying?

Nurture your retirement fund
Look closely at investment fund expense ratios
Don’t forget about your 401k plan, don’t cash it in, consider tax
Think about your 401k when you are changing jobs

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The Ultimate Guide to Getting More from Your 401k Plan