After setting up a 401(k) or other retirement plan, most people put it on “autopilot.” They check the balance from time to time to make sure it’s growing at the rate they expected, but other than that they leave it alone. However, unless you’re scrutinizing your plan’s performance, costs and other features on an annual basis, there’s no way to know for sure whether it continues to meet your needs.
As you conduct 401(k) plan wellness checks, ask the following questions:
What’s your plan’s current balance and is it on track?
When you first started planning, you likely estimated how much money you would need in retirement and devised a plan to reach that target. Given your current balance and projected future returns, are you still on track to meet your goals? If not, consider increasing your monthly contributions to the plan or shifting some of its assets into investment options that offer greater potential returns. If you’ve already maxed out your contributions, keep in mind that once you reach age 50, you can make additional “catch-up” contributions.
How are individual holdings performing?
Are your mutual funds or other investments performing well compared to market benchmarks? Make sure you compare apples to apples. If you have a small-cap growth fund, weigh it against something like the Russell 2000 Growth Index. If some investments are underperforming, look at other options in your plan. Plans often change or expand their fund offerings, so there may be more attractive options that weren’t available when you first selected your holdings.
Has your time horizon or risk tolerance changed?
Retirement plans are long-term investments that generally perform well over longer time horizons. But as you get closer to retirement and your time horizon shortens, you may want to consider shifting some assets into more conservative investments. Regardless of your time horizon, if market volatility or other factors have made you less comfortable with more aggressive investments, you may want to adjust your portfolio.
Does your asset allocation need a tune-up?
Allocating investments among asset classes, sectors and geographical areas that tend to perform differently under various market conditions increases the chances that at least some of them will perform well at any given time, reducing overall volatility. The mix of assets in your portfolio should also reflect your risk tolerance. For example, you could invest primarily in stocks if your risk tolerance is high. If your risk tolerance is lower, you might strive for a balanced mix of stocks and bonds.
Whatever your strategy, even the most carefully diversified portfolio can get out of balance over time. Check your asset allocation periodically and rebalance your portfolio if appropriate. As you examine your retirement plan’s asset allocation, consider it in the context of your overall investment portfolio. For example, your 401(k) plan may be stock-heavy, but these holdings could be balanced by the bond holdings in your IRA account.
Have fees risen?
Fees may be charged by your plan’s administrator for various administrative services or by the managers of the various funds in which your account is invested. But if you notice an upward creep in fees, there may be opportunities to shift your investments into funds that offer comparable returns at a lower cost.
Are your beneficiary designations accurate?
Review your plan’s beneficiary designations periodically to be sure that they’re up-to-date. If you’ve experienced recent life changes — such as marriage, divorce or the birth of a child — it may be time to update your beneficiary designations. You’d be surprised how many people get divorced but forget to change their beneficiary to someone other than their ex-spouse.
You also need to ensure that your beneficiary designations are consistent with your estate plan because beneficiary designations override the terms of a will or trust. Suppose, for example, that your trust provides for the bulk of your wealth to go to your children. If your tax-advantaged retirement plan is your largest asset and your spouse is the beneficiary, your children could be effectively disinherited. To ensure your wishes are fulfilled, you may want to designate your children or your trust as beneficiaries.
Don’t put it off
Like serious illnesses, problems with your retirement plan’s performance are easier to cure if they’re caught early. With regular checkups, you can help protect your plan’s financial health.
When to consider a Roth 401(k)
As you review your employer’s 401(k) plan, find out whether there’s a Roth option. Today, many companies offer both Roth and traditional plans to workers. With a traditional plan, your contributions are deductible, but your withdrawals in retirement are taxable. Conversely, with a Roth, your contributions are nondeductible but your withdrawals in retirement are tax-free (provided you meet certain requirements).
As a general rule, if you expect your tax rate to be lower in retirement, you’re better off with a traditional plan. A Roth plan may be preferable if you expect your tax rate to be higher in retirement. If you’re not sure what will happen to your tax rate in retirement, consider hedging your bets by doing some of both. Many plans allow you to split your contributions between traditional and Roth options.
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