After nine years of a bull market, your 401(k) retirement plan is likely your largest financial asset, perhaps even dwarfing the value of your home. Yet, while you pay attention to home repairs, you many not spend much time inspecting your retirement plan.
First and foremost, you should be contributing the maximum to get your employer’s matching contribution. Yet many people miss out on this free money.
Here are five more things you should consider about your 401(k) plan:
Know your plan’s investments: It’s amazing how many people know their account is growing but have no idea what their actual investments are, having never reassessed their original investment decisions.
What was once a conservative asset allocation certainly has become unbalanced with the booming stock market. So the first step is to take a look at the investments inside your plan and the alternative choices you might now want to consider.
Most 401(k) plans have very few choices that are essentially places to hide from turbulent markets, because these plans are designed to build retirement assets. Because bonds can be as risky as stocks in a rising rate environment, you’ll want to see if there’s either a money market alternative or a stable value fund to stash some of your account as you get closer to retirement.
Reconsider target-date funds: Ever since target-date funds were approved as a safe harbor investment for retirement plans — meaning the corporate plan sponsor could not be blamed for the results — most plans automatically invest contributions in a fund designed to grow more conservative as it approaches your theoretical retirement date.
But not all target-date funds have the same exposure to aggressive stock market investments. And not all have the same slope, or glide path, toward conservative investing as you age.
Understand the risk exposure in a target-date plan, instead of assuming it will all work out for the best in the end. Remember, you’ll have to sell shares to take required distributions once you reach age 70 1/2.
Roll over at retirement: Because a 401(k) plan is designed for workers to take advantage of the growth in the stock market over the long run, it might be worth moving your account by doing an IRA rollover to a diversified fund company like Vanguard, Fidelity or T. Rowe Price. That will allow you access to a wider selection of more conservative or income-producing investments.
Make sure this is a direct rollover from your employer to the new IRA custodian — making a mistake could subject your entire account to taxes.
And be sure to avoid the army of financial salespeople who are trying to sell you investment products for your IRA rollover account. You can get free, unbiased advice for asset allocation at these low-cost fund companies.
Understand the power of your 401(k) plan: Don’t be tempted to borrow from your retirement plan for what seems like good reasons, such as kids’ tuition or debt consolidation. That’s a huge mistake. You lose all the growth the money could have generated.
And if you leave your job, you must immediately repay the loan or face taxes and potential penalties.
Check plan fees and costs: Employers are required to disclose all 401(k) plan fees and costs annually. At www.EmployeeFiduciary.com, you can benchmark your company’s plan costs to see if they are reasonable. If not, get your co-workers together to demand a lower cost plan.
Your 401(k) plan is your nest egg. It will pay off in the long run if you watch over it closely along the way. That’s The Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books, including "The Savage Truth on Money." She responds to questions on her blog at TerrySavage.com.