Littlejohn: 7 Steps to 401(k) Success

The 401(k) plan is quickly becoming one of the largest sources of retirement funds for many American workers. According to the Society of Professional Administrators and Recordkeepers (SPARK), over 55 million people participate in 401(k) plans. If you participate in a 401(k) plan, the good news is that you have more control over your retirement money. The bad news is that you have more control over your retirement money.

For people who do not have the time or the financial knowledge, managing your 401(k) plan can be a daunting task. Moreover, if you do not manage it properly, the 401(k) may not be very useful when it comes to achieving your retirement goals.

Here are 7 steps that may help you with your 401(k):

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1. Participate

If all goes well, the dollars in your 401(k) account can make up a significant portion of your income during retirement. The government, and by extension your employer, are giving you the opportunity to take advantage of two very powerful financial tools: the ability to save money on a pre-tax basis and the tax-deferred, compounded growth of those dollars. Saving money before it is included in your taxable income is also likely to have the positive effect of reducing your income tax burden.

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Some employers offer their 401(k) participants matching funds as an incentive for them to save. If your employer is willing to give you money for retirement, you should definitely consider taking advantage of that benefit.

2. Determine your investor profile

Investor, know thyself! Every investor is different, and knowing yourself is the first step to being comfortable with the strategy you undertake. Remember, 401(k) money is retirement money, and everybody has different ideas about what they want their retirement to look like. But how comfortable are you with market volatility? Will you be able to tolerate the inevitable downturns that occur in the financial markets?

3. Allocate appropriately

Asset allocation is the principle of deciding how to spread your investments across various asset classes such as stocks, bonds, and cash. The idea is to diversify your holdings in an attempt to increase your returns while decreasing the amount of risk you’re taking. A variety of factors determine the ideal allocation for each individual. Perhaps the most important factor to consider is your time horizon. The more time you have to invest, the more aggressive you can usually be.

4. Limit exposure to company stock

Owning company stock can be a double-edged sword. On one hand, you might want to participate in the future growth of the company by being a shareholder. On the other hand, it’s risky to have too much of your portfolio in one stock. Having too much money in a single stock can create a portfolio that isn’t diversified enough.

5. Don’t panic

Tuning into the news and seeing market fluctuations on a daily basis can cause even the most stalwart of investors to get nervous occasionally. Stocks change in value all the time; it’s the nature of the beast. Just remember that you are investing in your 401(k) for the long term. Selling when the value of your investments is down may not be the best approach. When it comes to investing, patience is often a virtue.

6. Know your plan’s features

Every 401(k) plan has unique characteristics. To help maximize the benefit you derive from your plan, you need to be aware of all of your choices. The plan documents, which are usually distributed by your employer’s human resources department, will describe the options you have when it comes to things like hardship withdrawals, loans, vesting schedules, limitations on moving money, and in-service withdrawals. Read this document carefully, or ask someone who’s very familiar with the plan to review it with you.

7. Consider the tax consequences of your actions

Most of the things we do in our financial lives have tax consequences. For example, if you leave your current employer and decide to take a distribution from your 401(k), you may have a taxable event and possibly an early withdrawal penalty. You have several choices with respect to your 401(k) when you leave an employer, and it’s best to explore each choice before making a hasty decision. A tax pro can help you weigh the pros and cons of each choice.

Conclusion

Like it or not, you only get one shot at retirement. If you’re concerned that your 401(k) plan isn’t going to be enough of an asset when you get there, I’d encourage you to reach out to an expert (ideally someone who isn’t affiliated with the plan) for assistance. Some independent investment advisors are able to manage 401(k), 403(b), 401(a), 457, and TSP accounts for plan participants regardless of where those accounts are held.

Brian R. Littlejohn, MBA, CFP®, CFA is the founder of Sherwood Wealth Management, an independent, registered investment advisor (RIA) firm that specializes in inherited wealth. He lives in Aspen and works with clients in the Roaring Fork Valley and beyond.