In time where traditional pensions are all but extinct, 401(k) accounts are key to many peoples retirement strategies. You just set them up, make sure you put money in and thats it. Right?
Trick question. A 401(k) needs management in order to be the retirement nest egg you want it to be. Your employer put it in place for you, but its up to you to make it work for you.
Theres plenty of information out there on managing a 401(k) and the mistakes people make with their accounts. Even the IRS has some definite opinions on how you should go about making 401(k) decisions.
Weve assembled some of the more common things people dont realize about their 401(k) accounts, along with some resources to help you make the most of yours.
It Costs You Money to Have a 401(k)
Employer-provided doesnt mean 100 percent employer-funded. There are personal costs involved with a 401(k), as there would be with any other type of investment strategy. Your 401(k) is money youre giving someone else to handle for you. You are trusting them to act in your best interests. And money managers dont work for free. They charge fees for their services.
What are some the things that might have a fee attached?
Investment Services: Like any other money manager who charges fees for making investments on your behalf, the organization running your 401(k) charges for the investment aspects of your account.
Administrative Services: Simply keeping the books on your companys overall plan and each individual account requires people who need to be paid. And when you call in to speak to a customer rep about your account, his or her salary has to come from somewhere.
Those are just two very common types of fees involved with a 401(k). There can be others, and they can pile up. Based on the size of your company and the size of the overall plan, fees for a participant could average anywhere from below 1 percent to more than 3 percent of an accounts value.
Too many people have no idea what percentage of their money is going toward fees. Ask your HR department or the company managing your account about the types of fees youre paying and if there is any way to structure your account activity to minimize fees.
What Your 401(k) Goals?
A vague goal, like retirement savings isnt enough. 410(k)s are useful tools to achieve very specific goals. Ask for advice on how to set milestones for your account. If such help isnt available, you can talk to a financial advisor or make some calculations yourself using online tools, such as a free 401(k) calculator. Just be sure to revisit your retirement goals every year to be sure youre staying on track.
Get Every Dollar You Have Coming to You
If your employer offers matching contributions, you should at the very least be contributing the maximum salary percentage that your employer will match. Not doing so is a bit like turning down a direct offer of money from your employer in the hallway.
Be Proactive About Your Account
Make sure you understand your 401(k) and use it to your best advantage. Look into the various investment strategies your 401(k) offers and make a careful choice about what kind of investments you want your money involved with. Depending upon your age, life stage and saving goals, you may want to choose aggressive, higher-risk funds with large return potential. Or maybe you prefer more conservative and less risky funds with lower returns, or a mix of both.
Dont Forget About Accounts When You Change Jobs
People dont tend to spend their entire careers at one company anymore. Its conceivable a person might leave a company but leave money in that companys 401(k) plan because its performing well. Whats more, that could happen more than once. Stay on top of any accounts you have through former employers. Those excellent returns you once saw might falter, giving you reason to consider rolling that money into your latest account or an IRA.
Leave Your 401(k) Alone
It may be tempting, at some point, to borrow money from your 401(k) account. Many plans offer that option, but its something you should do only if absolutely necessary. For one thing, there are fees involved with such a loan. Also, when you lower the balance of your account through a loan, the amount of money you have available for investment and interest-accrual is lessened. You can lose a lot of ground in the march toward your overall retirement goal.
Dont Bet Everything on Your 401(k)
A 401(k) is a great part of any retirement strategy, but sit should be just that—a part. Make sure you have a broader strategy in place. Look for other income streams and savings options that can become part of your strategy, as well.