Taking a Deeper Look into Your 401(k) Plan

Published by Taylor Financial Group

Saving for your retirement is not as simple as black and white. Your 401(k), 403(b) or 457 plan can come with many features that can be confusing, to say the least.  Having said that, it is important to be educated on the features that your retirement plan holds as properly utilizing these vehicles could make you lots of money during your working years and beyond!  Attention to detail is key to avoiding common mistakes. Being well-informed can prevent errors, help maintain the value of your investment, and ensure appropriate allocation.

When it comes to your 401(k), the options can be complex and the investment choices can seem overwhelming. Making mistakes are more common than you may realize. Don’t hesitate to ask questions and request literature, and, remember, we are always here for you to assist in maximizing this important benefit. We discuss below the most common mistakes we see with 401(k) Plans. Try to avoid these errors with your own 401(k) Plan.

Allocation Strategies
Developing an asset allocation strategy that matches your risk tolerance and time horizon should be a priority to ensure that you will be on track to meet your goals. By selecting a Target-date fund, you can properly position your asset allocation in an age and risk appropriate setting. However, every Target Date Fund is designed differently, with a different equity allocation and a different glide path, so make sure that the target date fund offered by your employer matches with your goals. If it doesn’t, then you should build your own investment options. For example, if you are 55 years old, you probably should still have a fair amount of equities in your 401(k) Plan as your life expectancy is at least another 20-30 years (and beyond!!).

It is important to factor in your other investments when creating your asset allocation strategy. For many people, a 401(k) plan is not their only investment. For example, if you have a non-retirement portfolio that is very conservatively positioned, it probably doesn’t make sense to replicate that strategy in your 401(k) plan.

Performance Chasing
It is also typical for investors to engage in “rear view mirror” investing, basically chasing yesterday’s top-performers. Selecting a fund based on what is “in or out” this year or solely on past performance can be a mistake as studies show that individual investors have a tendency to underperform the sector that they have purchased in to, simply because they are buying high and selling low. Performance chasing is rarely a good idea. A better idea is to create a broad strategy that is equity based and stick with it.

Too Many Eggs in One Basket
Do you own company stock in your 401(k) Plan? A mistake seen far too often is when a 401(k) participant is heavily weighted in their company stock. Putting all of your eggs in one basket is rarely a safe bet. In the event that the Company takes a turn for the worse, so will your portfolio (and potentially your job prospects!).

Cash Values
Another mistake we see far too often is absurdly high cash values in 401(k) Plans. Why? What is the benefit of holding cash over long term periods?

Beneficiary Updates
Can you remember the last time you updated you beneficiaries? It is crucial to stay on top of these designations. Often a beneficiary is designated at the account opening, and then life changes, whether it is marriage, divorce or just personal preferences, so make sure that the designated beneficiary is current.

Increasing and maximizing your contributions over time is also critical. It is called compounding and the longer your money has to grow, the better. The contribution limits today are $18,000, and for those age 50 and over it is $24,000. Taking advantage of those limits is just another way you can help yourself and your portfolio in the long-run.

Some employer plans allow additional after tax or Roth contributions, which you should also consider. The Roth 401(k) contributions are made up of after-tax money, so being taxed when the money is withdrawn will not be a concern and it will allow additional flexibility once you retire. We assisted one client in this area and she was able to contribute $ 50,000 in total to her retirement plan based on our discussions. Contact your Human Resources Department and request whether you can make additional contributions and feel free to discuss with us as this area can be very technical (and confusing).

All in all, our bottom line is that you should maximize your contributions when possible, and make sure that your money within the plan is working for you as much as possible! Let us know if you have any questions. We are here to help.

Morningstar Article, 401(k) Investors: Avoid These 20 Mistakes by Christine Benz, 2/23/2017

Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera Advisor Networks LLC is under separate ownership from any other named entity.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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