Your 401(k) is the best option for ensuring you retire when and how you want. But it's not likely your employer offers much 401(k) investment advice, making it important for you to gain as much knowledge as you can. Here are three ways you can best manage your 401(k).
1. Read your materials
This sounds basic, and it is, but few people actually spend time doing it. According to a 2012 LIMRA study, two-thirds of Americans with retirement plans admitted spending less than five minutes reviewing their retirement-plan disclosures. Worse yet, 20% said they "rarely or never read disclosure paperwork at all."
By not reading your materials, you could be missing out on valuable pieces of information regarding your plan. Ask your HR department for a copy of your summary plan description, or SPD. That's a plain-English document that provides you with the ins and outs of your plan. Learn about your possible company match and profit sharing, 401(k) loan provisions, and much more.
2. Pay attention to fees
The same LIMRA study mentioned above showed that 90% of 401(k) participants either didn't think they paid any fees or didn't know the fees they paid for their plans. But you, as the 401(k) plan participant, pay for most plan fees -- not your employer. While fees have decreased substantially in the past decade, everyone pays a fee to have a 401(k). In a 2011 Fee Study conducted by Deloitte for the Investment Company Institute, the median "all-in" fee stood at 0.78% per year. That means a typical 401(k) owner would pay about $780 annually for every $100,000 in his or her account.
Small improvements in plan fees can pay off big-time. A Government Accountability Office study compared the difference between paying 1.5% in fees versus 0.5%. It started with someone with a 401(k) account balance of $20,000 and assumed the investment grew by 7% each year. A person paying 0.5% in fees would have about $70,500 in 20 years, but a person paying 1.5% in fees would have a retirement balance of only $58,400 in 20 years, representing a cost of more than $12,000.
Plan fees fall into three categories: asset-based (mutual fund expense ratios), administrative (record keeping and custodial service fees), and individual participant fees (special-request activity like expedited paperwork and overnighted checks). Historically, these figures weren't spelled out in hard dollars and cents for you, but a 2012 Department of Labor ruling changed that. Obtain your plan's Fee Disclosure Notice to find out more about the fees you pay.
3. Know your options
Despite hefty tax consequences and possible penalties, nearly half of all workers cash out their 401(k)s when leaving a job. If you're changing employers, carefully consider three better options for managing your old 401(k).
- You can leave it where it is. Some former employers let you keep your money there -- even if you aren't.
- You can move the money into your new employer's plan, so long as they'll accept it. This is a smart move if the investment options and fees are better in your new plan.
- You can roll over your account into a traditional IRA, which boasts the same tax treatment as a 401(k). If you're a hands-on investor, this self-directed retirement account is a great option. If you move money from one retirement account to another, be sure to initiate a trustee-to-trustee transfer. Work with both institutions to make sure this is done correctly. If, instead, you do take possession of the check, get it to the new institution within 60 days to avoid taxes and penalties.
Foolish bottom line
Being a good steward of your 401(k) means reading and understanding your plan materials, paying attention to fees, and knowing your options when you change employers. By implementing this 401(k) investment advice, you'll be one step closer to securing your financial future.
