My company recently changed the employer match for our 401k contributions, which reminded me to do a little maintenance on my 401k. I usually go over my plan at the beginning of every year, but I decided to go over everything again with the recent changes in our plan and my family situation – having a baby and my wife becoming a stay at home mom. These tips should help you manage your 401k plan and I recommend going over them at least once a year, or any time you have a major life event.
Take advantage of free money
Max out company match. If your company offers matching contributions, then you should contribute at least the amount of the full company match if you can afford it. The company match is part of your benefits package and is essentially free money.
Manage 401k Contribution Limits
Employees can contribute up to $17,000. Determine how much of your salary you are able to contribute to retirement plans, then determine where to allocate contributions. Depending on your tax bracket now and expected tax bracket in retirement, you may be better off contributing enough in your 401k plan to receive the maximum company match, then contributing to a Roth IRA. If you are able to contribute enough to cover the company match and max out your Roth IRA ($5,000 in 2009), then consider increasing your 401k contributions. (See other 2009 retirement plan contribution limits).
Managing 401k fees
All 401k plans come with associated fees, such as administrative fees, investment management fees, and trust custody fees. Participants usually pay some of these fees and the company pays others. 401k plan administrative fees associated with maintaining your individual account, such as recording and tracking your contribution amount and investment selections, are usually paid by directly by your company.
Invest in low cost funds. Many 401k plans feature funds with high expense ratios. Look for index funds and other low cost funds for your investments. High expense ratios will destroy your growth.
Watch for increased fees if you leave your company. You should double check who pays for your administration plan fees after you leave your company, as some companies will no longer pay administrative fees for former employees. Here are more tips regarding what to do with your 401k plan after you leave your job.
Double check your asset allocation
Asset allocation is outside of the scope of this article, but the mid year is a good time to make sure your asset allocation is appropriate for your age and the amount of risk you are willing to take with your retirement accounts. Here is a good resource to get you started on your asset allocation. If in doubt, then I recommend visiting a fee only financial planner to discuss your retirement needs.
You may find these related articles helpful:
- Should You Contribute to a 401k Without an Employer Match?
- How Many Retirement Accounts Can You Have?
- Know Your 401k Retirement Plan Fees.
- Five Essential 401k Tips.
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I need to see if my company has a 401k. Thanks for the reminder.
Good advice. First step save money in your 401(k). Next manage your asset allocation while considering fees and performance. You should manage your 401(k) as a part of your overall investment plan. As an example, You may want to increase your 401(k) foreign stock holding (if it offers a good stock fund with low expenses) and then reduce such holdings outside of your 401(k).
Far too often I read about x safe investment and y risky investment. In reality investments are part of the whole and it is much more sensible to discuss how investments fit your overall investment picture. Money market funds are relatively low risk. But a portfolio that is 100% money market funds for long term and short term needs is not the least risky. Adding some stocks funds to such a portfolio does not make it more risky.
“Watch for increased fees if you leave your company. ”
Great point. Another reason to roll over to an IRA.