How to Evaluate Your 401(k)

by Miranda Marquit · 0 comments

looking at piggy bank
One of the ways many people invest is through their 401(k) plans. These plans come with tax advantages, and some employers even contribute matching funds. For many people, the 401k plan is a way to save for retirement without too much effort. However, there are some things you should consider when it comes to your 401(k). Retirement startup FeeX offers these considerations when evaluating your 401(k):

Do You Know What You’re Paying?

First of all, do you understand what fees you are paying for your 401(k) plan? Many of us don’t stop to think about investment costs since we don’t physically have to pay from out of pocket. However, check for fees and expenses that might be reducing your real returns over time. There’s a difference between a plan that with 1% in fees and one with more than 2% in fees and expenses. Over decades, those fees can mean tens of thousands of dollars missing from your nest egg. And plan administrators are required to share this information with participants, so look it up and make changes accordingly.

Also, don’t assume that higher costs are translate to higher returns. According to FeeX, over the past 20 years, the percentage of active funds underperforming their benchmarks is right around 75%. There is a good chance your high-cost funds aren’t turning in performances that make the cost worth it.

(Here are a few suggestions on how to pick the right mutual fund in your 401k plan.)

Recent regulations have required more transparency in 401(k) statements. Take advantage of this reality to review your statements and look for the fees charged. You can also look to see if your employer is helping cover some of the fund fees. You might have to cover the expense ratio for the funds in your plan, but your employer might be paying the additional fees for administering the plan. Find out who’s paying what so that you can make an informed decision about your participation.

What Options are Available to You?

Check into the plan options available to you. Look for low-cost index funds if you want to reduce your fees and see decent returns. “A plan should offer at least a few low-cost index funds, plus a set of low-cost target date funds across several asset classes to be considered for what we would define as a good plan,” points out FeeX.

Take a look at the available options in your plan, and ask your plan administrator to look for better options if the selections are sub-par. While you can’t always change what’s being offered, you can evaluate the offerings and make the effort. If you can’t find good, low-cost options with your current plan, it might make sense to move some of the money into an IRA that allows you to choose your own low-cost funds as soon as you get the chance.

If your employer offers a match, consider contributing what you need to in order to obtain the maximum match, and then take the rest of your contributions elsewhere if you are eligible to contribute to an IRA. You don’t want to leave free money from your employer sitting on the table, but at the same time there’s no reason to put more money into a bad 401(k) than you have to.

Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.

They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.

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