Now that the fiduciary rule has finally gone into effect, 401(k) trustees are required to act in their clients' best interests -- and quite a few of them have had to scramble to change their offerings as a result. Some employers, unhappy with the new plans, have reacted by switching to new providers; and even if your own employer didn't change 401(k) providers, you may be faced with significant changes your plan's lineup. So what do you do about it?
Talk to HR
If your employer changed providers, it would help a lot to find out what motivated them to change and why they picked the new provider and plan lineup. Of course, you may not have access to the people who made these decisions, but you can often get a sense for their reasoning by discussing the change with your HR representative. You'll also need to find out what the deadline is for rollovers and contribution changes, if the company matching contribution will change, and whether there's a blackout period. Your HR representative should be able to answer all of those questions for you.
Evaluate the new plan
Whether your employer changed 401(k) providers or your existing provider just shook things up a bit, you'll need to take a look at the new plan offerings and figure out which of the options are best for you.
To maintain a solid retirement portfolio, you'll want to have both stocks and bonds represented in your 401(k) account; most 401(k) plans offer a target date fund that includes both types of investments and will shift your allocations between stocks and bonds for you as you approach retirement.
If you'd rather have a little more control over your asset allocation, skip the target date fund and instead choose a stock fund and a bond fund in the proportions you prefer. A good rule of thumb is to subtract your age from 110 and put that percentage of your 401(k) investments into stocks, with the remainder in bonds.
One thing you'll definitely want to look at for any fund is its expense ratio. High fees can cut significantly into your returns, meaning that an expensive fund with high returns may actually end up putting less money in your pocket then a cheaper fund with slightly lower returns.
When choosing a stock fund, it's wise to look for one that offers a decent amount of diversification. An index fund that follows the S&P 500, for example, would give you an excellent level of diversification, while one that followed just a single sector (such as healthcare or technology) would expose you to a high level of concentration risk.
Index funds are typically a better choice for retirement accounts than actively managed funds, because they have much lower fees on average yet tend to perform roughly as well over the long haul.
If your 401(k) trustee offers the option, you might also put a small percentage of your stock money into international stocks; that gives you yet more diversification in your portfolio.
As with stock funds, choosing a broad-based index bond fund offers you the highest possible level of diversification while minimizing fees. Bond fund options tend to be even sparser than stock fund options within 401(k) plans; in fact, you may only have one bond fund available, which makes it pretty easy to pick a fund. If you do have multiple options, go with an intermediate-term bond fund, which threads the needle between the typically lower returns from short-term bond funds and the higher risk of long-term bond funds.
Once a year, go back to your 401(k) account and check on its performance. If you've chosen a target date fund, confirm that the fund is performing well compared to the overall market and that it's still allocating your funds appropriately between stocks and bonds. If you've picked a stock fund and a bond fund, you'll probably need to readjust the balances to keep the allocation at that "110 minus your age" number.
Take a look at fund fees as well; if they've gone up sharply since you last checked, consider moving your money into different funds. The whole process generally takes just a few minutes, and ensures that your retirement portfolio will keep ticking along and producing the best possible returns.
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