Posted by CONTINENTAL TAX AND ACCOUNTING SERVICES

How to Successfully Manage Your 401k

How to Successfully Manage Your 401k

For creating retirement accounts for employees, many companies use the 401(k) plan. Often along with a little incentive and a portion of your paycheck from your company, you are charged with managing the allocation of those funds into an offering of investment products and goes into an account. 

Managing your funds with greater authority and ease is what you can get if you will gain a grasp of some of the 401(k) plan foundations. You will be in a better position to make decisions that relate to your individual financial situation as long as you are with the right basic principles in place. 

1. Hiring an Account Manager

Providing you meet the minimum balance, there are plenty of financial advisers who would love to manage your retirement account. Even if your balance is small, there are also some online services that can help you make good financial choices. However, nothing is free from both of these services. 

An investment firm, Financial Engines, Inc. reported in 2014 that assets managed by professionals saw an average of 3.32% more in returns than accounts without professional management. Interestingly professional managers could charge a fee of nearly 3%—in some cases more—of your total account balance. However, there are some online services that might charge less.

It is worth getting help from a professional you can trust if you have little investment knowledge. Also, in some 401(k) plans you might be given model portfolios that you can follow and some free advice from a professional. You may also try to manage your investment portfolio yourself if you have some knowledge of investments. 

There are advisors who will work with you if you want to choose a combination of both a professional manager and a do-it-yourself approach. 

2.  Contributing the Max

Contribute as much as you can until they stop matching the funds if your company is matching your contributions up to a certain point. Your company is giving you free money to participate in the program regardless of the quality of your 401(k) investment options. Always say yes to free money. 

Until the match runs out and once you reach the maximum contribution, consider contributing to an IRA, use every single penny available. 

3. Re-Balancing is really important

Your 401(k) is just like your life that needs full of routine maintenance. Re-balancing is another term for maintenance in the investment world. In your overall portfolio, as different assets move up or down in value, they become a smaller or larger percentage. 

Having a specific allocation of stocks and bonds is what financial advisers suggest. For example, you might have 80% of your money in stocks and 20% in bonds if you’re 40 years old. You may have to buy or sell assets if that allocation becomes out of balance. 

4. The basics of investing should be learned

You need a basic knowledge of investing in order to evaluate different funds in your 401(k) or to understand what your financial professional is saying. Understand terms like risk tolerance, 12B-1 fee, and expense ratio. Look up the terms if there are some that you don’t understand. Never forget to thoroughly read the information sent to you by your plan. 

5. Loving the Index Fund should be learned

The appeal of stock picking is what some people love. According to research, the gambling of finding like the next Google or Tesla that will return hundreds of percentage points over a relatively short amount of time is thrilling and generally doesn’t work very well. 

A market index is what index fund simply follows. A fund that follows the S&P 500 rises and falls with that index. The funds that you try to pick the next great stock are expensive than the fees you pay for index funds and there’s no guessing which stock will outperform the market. Actively managed funds being outperformed by index funds over the long term is shown on some research too. With a retirement account, you should never make short-term decisions.

6. Target Date Funds 

You should think carefully before investing your 401(k) in a target date fund. As you move closer to retirement, these funds geared to evolve. You would invest in a target date fund that matures in the year that you will retire. As the target date gets closer, the fund’s managers will continually re-balance the fund to maintain an appropriate allocation. 

Funds use different allocation strategies which may or may not be a good match with your goals that’s why this may not be the best route for starters. The performance of the target date fund is largely based on fund managers. Picking a fund is difficult since you probably don’t know the good managers from the bad. 

Novice investors don’t understand the golden rule of target date funds which is if you invest one, you shouldn’t invest it with others. It’s close to an all-or-nothing investment-- that’s what most financial advisers agree. If you invest your 401(k) in other funds then that throws off the allocation.

7. Solely relying on 401(k)s

From the several retirement vehicles that you have, your 401(k) should be one of them. Part of your mix should be a side business, your home, collectibles, and other investment accounts such as an IRA. 

Think carefully if it makes sense to roll over your previous company’s 401(k) into your new employer’s plan or into an IRA if you are going to switch jobs. More investment choices are what the IRA may give you. You will likely see better returns if you spread your assets over multiple income streams. 

The bottom line is you need to take an active role in your retirement planning regardless of your age. After exhaustively researching your options, sometimes that is as easy as monitoring your investment. Working with a trusted financial adviser to set long-range goals is what it means sometimes. Your retirement will happen faster than you imagine. 

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