We've reached the start of another new year, and you know what that means. Like many Americans, you've probably resolved to hit the gym, rethink your eating habits and get back into shape. But while you're focusing on physical fitness, don't forget about your financial health. Now is also a great time to flex your financial muscles.
Financial fitness is more like a marathon than a sprint, and it takes dedication over the course of your career to see the results of your hard work. The process can be much more manageable if you take small steps that have the potential to add up to big results. So, for the next month, I'm challenging you to take one action per week to help make the most out of your 401(k), a critical source of retirement savings for many American workers. You can also repeat these moves throughout the year to keep your plan working for you.
Week 1 - Tie Up Loose Ends
If you've switched jobs in the last few years, you may still have a 401(k) from an old employer. In the first week of the challenge, take stock of any older accounts and decide what you'd like to do with them. You have a few different options for addressing an old 401(k), including rolling it into an IRA, moving it to your new plan or leaving it alone. If you choose the latter, be sure your investment options reflect your current preferences. With this resolved, you can focus your energy on your current plan.
Week 2 - Pump Up Your Contributions
One of the most important things 401(k) savers can do is contribute enough to take full advantage of any matching contributions offered by their employer. That's because the employer match is like an automatic return on investment that you can't get anywhere else. A recent survey* found that 87 percent of participants are taking this critical action, and you'd be wise to follow their lead. But while this is a great starting point, the reality is that the contribution level required to get the full match may not be enough to help you save sufficiently for a comfortable retirement. Try to increase your contribution by a percentage or two each year until you've reached an optimal level for you. You may have recently earned a raise or year-end bonus, and your 401(k) is a great place to direct some of those dollars.
Week 3 - Explore Low-Cost Options
This week, take a close at the individual funds in your portfolio with an eye towards the fees you're paying. Make a special note of any low-cost index mutual funds or exchange-traded funds on your plan's menu. These kinds of funds often have lower investment management fees, so investing in them can mean putting less of your savings toward fees and putting more into your account.
Week 4 - Find Your Balance
Last year proved to be quite a volatile one for the stock market, and 2016 is already off to a bumpy start. Such swings in the markets may skew your 401(k) asset allocations if, for example, stocks either underperform or outperform bonds and other kinds of investments in your portfolio. In the final week of this challenge, evaluate your portfolio to ensure you have the right mix of assets to give yourself the balance of potential growth and risk appropriate to your situation, and consider the investment management fees you examined in Week 3.
If you need some help with this important step, plenty is available. Many 401(k) plans offer access to professional 401(k) advice including how at allocate your investments. The benefits of 401(k) advice are tangible: research from Morningstar Associates, LLC suggests that participants receiving advice as part of a managed account service could end up with nearly 40 percent more income in retirement.**
The year has only just started, but if you follow these straightforward steps you could be well on your way toward a healthier 401(k). Invite a friend, co-worker, spouse or partner to take the challenge along with you for extra encouragement.
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*2015 401(k) Participant Survey conducted by Koski Research for Schwab Retirement Plan Services, Inc. Koski Research is not affiliated with Schwab Retirement Plan Services, Inc.
**This figure represents the potential wealth increase an average 25-year-old could have at retirement when using a managed accounts service versus an average 25-year-old that did not use a managed accounts service. The analysis is based on 58,444 participants who used the Morningstar® Retirement ManagerSM service between the dates of January 2006 and February 2014.
Morningstar Associates is not affiliated with Schwab Retirement Plan Services, Inc.
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