The Dow Jones Industrial Average has hit something like 30 new highs this year alone, the S&P 500 is near record levels as well. Twitter just went public and Obama Care will go into full swing in 2014. What does any of this mean to you as a 401(k) investor? Here are five 401(k) investing tips for this or any market environment.
Rebalance your account
If you’ve let your holdings run it’s quite likely that your account is over allocated to equities given the strong showing the stock market has made so far in 2013. This would be a good time to look to rebalance your account back to the original allocations that you had intended. Paring back on stock funds might seem counterintuitive, but essentially you are taking some of your gains off of the table in order to keep the risk associated with your overall portfolio in line.
Consolidate and coordinate
If you are just starting out in the workforce, it’s likely that your 401(k) is your lone investment vehicle. By the time you get to your 30s or 40s and beyond it’s likely that you’ve switched jobs several times and have left a number of old 401(k) accounts or IRAs in your wake. If you are married and both working multiply this financial clutter by two.
Consider consolidating your old 401(k) accounts either in a rollover IRA or into your current employer’s 401(k). Looking after a number of scattered accounts is counterproductive and makes viewing all of your investment holdings as a consolidated portfolio that much harder.
While we are on the subject, ALWAYS view your 401(k) account as a part of an overall consolidated portfolio. I create a spreadsheet for each client to do just that, with all of the technology available today this is not difficult, but it may take just a bit of time to lay things out the first time you do it.
The reason for this approach is so that you view your overall asset allocation and the diversification of your portfolio across all investment and retirement accounts. Are you taking too much risk or not enough? Do you own the same fund in three accounts all in different share classes?
Increase your salary deferral
This is the time of year where many companies have their employees go through Open Enrollment for their employee benefits. While you are thinking in terms of benefits this is a good time to boost your salary deferral to ensure that you are contributing the maximum to the plan. If you can afford it and are not on track to max out for 2013 ($17,500 and $23,500 if you are 50 or over) arrange to have more withheld for the rest of this year and figure out what percentage to apply to your first check in 2014. How you invest your 401(k) is important, but studies have shown that the amount you save for retirement is the biggest single factor in determining the size of your nest egg.
Don’t default to the Target Date Fund
One of the Target Date Funds offered by your plan might be the right choice for you. This may be the fund with the target date closest to your anticipated retirement date or some other fund in the series. It is important that you understand what is under the hood of the Target Date Funds and decide if this is the right approach for you. Note these funds change from time-to-time as witnessed by some recently announced changes that Fidelity will be making in its Freedom Funds.
Get the help you need
Many plan sponsors are offering advice options ranging from online advice to one-on-one advice to managed accounts. Check out these options and any fees associated with them. If you work with a financial advisor make sure that they are providing you advice on how to allocate your 401(k) account along with the advice they provide on your other holdings. Some 401(k) participants are savvy investors, others are not. If you are in this latter camp, bite the bullet and hire the advice that you need. This is important, it’s your retirement, and you only have one shot at it.
For better or worse the 401(k) and similar retirement plans are the main source of retirement savings for most of us. Make the most of your plan regardless of what is going on in the markets or the economy.
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Great tips! I am always scared of 401 (K). Learned a lot from the post. Thanks for the post.
Kevin thanks for your comment.
Thank you for the reminder! My open enrollment ends Tuesday. I was previously only investing 2%, but I decided to up it to 4%. Hoping to get to that max out eventually!
Thanks for the comment Michelle. Doubling your deferral rate is a great step, keep up the good work!
I like your pointing out to “ALWAYS view your 401(k) account as a part of an overall consolidated portfolio.” It can be very tax inefficient for people to hold the same asset mix in their tax-deferred and taxable accounts. And like you said, it is pretty easy to make a spreadsheet to keep track of the holdings in each account.
Bryce thanks for your comment.