Tips
for Making the Most of Your 401(k)
The term “do-it-yourself”
typically relates to the home improvement industry. But with fewer employers
funding retirement plans and the future of Social Security questionable,
“do-it-yourself” may well apply to retirement planning in general, and to
the 401(k) plan in particular.
The benefits of a 401(k) are
hard to beat. Your contributions are tax-deductible, you typically get a
matching contribution from your employer, and both your contributions and
earnings grow tax-deferred until they are withdrawn. But it is basically up to
you to make the most of your 401(k). Here are six timely strategies to help you
do it yourself.
1. Know Your Plan
The past few years have
brought about many improvements to 401(k) plans — more investment choices,
enhanced employer contributions, and better reporting, to name a few. To
maximize the benefits of your 401(k), you need to know and understand your plan
and its features. Take the time to read the material your employer provides.
2. Contribute the Maximum
To get the most out of your
401(k), you have to put the most into it. Your company sets the maximum
contribution as a percentage of your salary up to the IRS limit ($10,000 for
1998 and 1999). Keep in mind that each dollar you contribute to your 401(k) is
deducted from your taxable income so you avoid paying income taxes on that money
until you withdraw it, typically at retirement. And since all the interest and
capital gains earned in your 401(k) grow tax-free until withdrawn, your money
grows at a faster rate than it would in a taxable investment.
Most companies that offer
401(k) plans match all or part of your contribution, which significantly raises
your rate of return. If you cannot contribute the maximum the law allows, at the
very least try to contribute enough to earn the full employer match.
3.
Invest for the Long-Term
Most company plans provide a
broad range of investment options. Typically a plan will offer one or more stock
mutual funds, a bond fund or fixed-income contracts, a balanced fund, a money
market mutual fund, and, perhaps, an international fund. Oftentimes investment
in the company’s own stock is another option.
Strive for a diversified mix
of investments. The further you are from retirement, the more you can afford to
take a few risks and invest in stocks or stock mutual funds. As you get closer
to retirement, you can shift your allocation so it’s more heavily weighted
toward vehicles that are subject to less marketplace vulnerability. But don’t
do away with stocks altogether; stocks play an important role in the continued
growth of your retirement nest egg.
4.
Monitor Your Investments
It’s your responsibility to
keep a close watch on the performance of your 401(k) investments. Most plans
provide quarterly reports and some even have a toll-free number for up-to-date
balance figures. At the very least, the law requires that you receive an annual
statement. Review your reports carefully and compare your funds’ performances
to those in the Standard & Poor’s 500-Stock Index or to other performance
averages for the different types of funds you hold. It is important that you
regularly rebalance your 401(k) holdings to reflect your long-term goals. How
often you can change your investments and your allocations depends on your
plan’s rules. Some have fixed dates, some permit only a certain number of
transfers per year; the better plans allow daily adjustments. Just don’t get
carried away trying to time the market.
5. Keep an Eye on Expenses
The do-it-yourself nature of 401(k) plans extends
to paying investment fees and administrative costs. You are responsible for
paying these expenses, which are typically deducted from your plan and reduce
your earnings. If you feel these expenses are too high, don’t be shy about
bringing your concerns to your employer’s attention.