401(k) Questions You Should Be Asking

Sep 26, 2013 4:50:08 PM / by Jason Shaw

401k questions

  • How much should I contribute?
  • How do I choose the right fund?
  • Should I be reviewing my plan more (or less) often?
  • Am I draining my retirement resources?

How much should I contribute?

How much of your income that should be deferred to your 401(k) depends on what you can reasonably afford, how much your employer will match in contributions, your current age, and how much you have already saved.  As a starting point, understand that you will maximize the amount you save by deferring enough to qualify for all matching employer contributions.  For example, if your company will match your contributions or a portion thereof to up to 6% of your earnings, then you should consider that a minimum amount.  Of course, if foregoing 6% of your pay makes it difficult to meet your necessary expenses, you should start with a lower percentage and increase it as your income increases.  CNN Money offers an online tool to help you determine how much you should aim to put away each year based on your age, income, and current savings.

How do I choose the right fund?

Your employer’s list of fund options may be dizzying.  Although predicting performance is tricky at best, the cost of a fund is knowable and will likely have a significant impact on your eventual savings.  Index funds are among the lowest cost available and tend to perform well over time.  Forbes recommends choosing funds that have an expense ratio of less than 1%, including record-keeping and management fees.

Should I be reviewing my plan more (or less) often?

As your plan ages, it is likely that the target percentages you chose will shift and become skewed in favor of the higher-earning, more volatile investments.  This makes your money more vulnerable to market fluctuations.  The standard advice is to rebalance your 401(k) fund regularly, either annually or at any time when a portion of your investment goes outside its target range by at least 5%.  Some plans offer automatic annual rebalancing.  Target-date funds, which shift assets from riskier stocks to more conservative bonds as your projected retirement date approaches, may be an additional option.  These features help to ensure that your funds are allocated appropriately, even if you don’t take the time to review your plan.

You may also choose to actively manage your plan.  If you do so, beware of emotional investing.  Rebalancing involves moving money from high-performing funds to lower-performing funds, which can be difficult to do.  Bear in mind, however, that the point is to reduce risk over the long term so that your retirement income is more secure.

Although periodic rebalancing is considered prudent, consider the transaction fees and trading expenses involved.  Frequent rebalancing can cost you more than you save by keeping tight control over your portfolio.  For a critique of frequent or regular rebalancing, explore this article from Forbes.

Am I draining my retirement resources?

If you have taken loans from your 401(k), it is a good idea to repay them as quickly as you can.  Life is unpredictable, and unforeseen circumstances may force you into gathering money from whatever sources are available to you.  In that event, you’ll be grateful for the option of withdrawing money from your retirement savings, but your future self will thank you for replacing it as soon as you’re able.

The financial professionals at Boelman Shaw Tax & Financial Planning in Des Moines can help you determine how much you should be saving for the retirement lifestyle you desire and find the right investment balance for your 401(k).

Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.

Topics: Financial Planning

Written by Jason Shaw