Three Tips to Help You Get the Most Out of Your 401(k) Account

By Stuart Robertson

Whether markets are up or down, over a career, contributing to your 401(k) can make a big difference in when and how you retire. Yet, it can also be overwhelming figuring out which funds to select in your plan to get you there. Often, you’ll have 20, 30 or more funds from which to choose.

Let’s break down the basics to help you get the most out of your 401(k).

  1. When it comes to how much you will save for retirement, studies show the biggest key is the amount you choose to invest in stock, bonds, and cash funds. This is called your asset allocation and it should be your number one priority. It’s important to make sure your 401(k) account’s asset allocation aligns with your long-term goals. Factors like time horizon and risk tolerance to the market can vary per person, so your “ideal” asset allocation may be different than that of others.
    If this sounds a bit vague—don’t panic. For more concrete guidance, there is a rule of thumb you can follow. Simply use your age to determine the amount you should invest in cash and/or bonds, then allocate the rest to stocks. For example, if you are 35, place 35% of your 401(k) funds in bonds and 65% in stock funds. Note, if you are more aggressive or have other savings, you may want to up your stock holdings 5%-10% more than the general rule of thumb or work with a financial professional.
    If you’re uncomfortable picking your own investments, you can also opt for a model portfolio or target date fund that best fits your situation. Model portfolios are designed by professionals, and they manage the fund selection and asset allocation within the model portfolio. There are generally a spectrum of model porfolios from which to choose ranging from conservative to aggressive. If this option sounds like the right choice for you, simply select the one that best fits you, and you’re set. Note that if your plan offers target date fund you choose the year closest to when you plan to retire (fyi, target date funds are a bit obscure in how they account for your risk tolerance but can be a simple solution).

  2. When comparing similar investments (e.g. you might have 3-4 large cap stock funds), you likely want to choose the low-expense option(s), preferably index funds. While there are no guarantees, historically, research shows that low-expense funds have outperformed high expense funds over the long term. It’s a good idea to look at performance over five or more years of time too in your review. Looking at shorter periods of time may misrepresent how well the fund is managed.

  3. The next big thing to do is take advantage of auto-rebalancing. This feature automatically adjusts your asset allocation (how much you have in stock and bond funds) to the percentage you choose. If you chose a model portfolio this should happen automatically unless you opted out of auto-rebalancing (suggest opting back in if you did). If you are selecting the funds on your own, this can be setup to occur either every quarter and/or annually depending on your provider’s options. Many people’s asset allocation gets out of whack as they may not regularly review their account to make these needed adjustments on their own. This can expose your money to greater market risks than you are comfortable. Overexposure from "drift" can feel good in up markets but can be downright disturbing in down markets. Auto-rebalancing helps you keep your investment strategy in line with your goals.

If you’re looking for some more information to help you get on the right path, check out Investing 101 for Your 401k.

*This material is intended only as general information for your convenience and should not in any way be construed as investment or tax advice by ShareBuilder 401k. *

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.