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Review Your 401(k) Accounts for Best Performance

Sept. 26, 2014
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By Andrew Comstock

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With a little more than three months left in 2014, it is an ideal time to review your 401(k) account. We sometimes take for granted that our 401(k)s essentially run themselves once we set up our contributions and select our investments. It is important to occasionally review your 401(k) account and your company’s plan.

Review your contribution amount.

As a general rule, we should all be contributing more to our 401(k) or other retirement accounts. You can contribute up to $17,500, or $23,000 if you are over the age of 50, each year to your 401(k). This does not include a matching contribution from your employer. Assuming you are not contributing the maximum yet, you should challenge yourself to contribute more. Even if you only add 1% of your salary to your 401(k), it will make a meaningful difference down the road. Also if you received a raise this year, consider adding part of your raise to your 401(k) contribution. It is an easy way to build up your 401(k) account balance. As always, if you are contributing below your firm’s matching contribution, increase your share to meet it.

Consider a Roth 401(k) option.

More 401(k) plans are starting to offer a Roth 401(k) option. This is worth looking into because it can offer favorable long-term benefits in retirement. Because this would be an after-tax contribution, you lose the tax benefits today, but you will not have to pay income tax on withdrawals in retirement. You should review this with your financial planner, accountant or financial advisor before making this change.

Review your investments and rebalance.

For many investors, opening your statements and checking the account balance is the extent of any review of your 401(k). It is important once a year to see whether there are any new funds added to your plan and review the performance of your current funds relative to their benchmarks. You can use Morningstar’s website as an easy reference in under 15 minutes.

You should also rebalance your account annually. You are likely contributing a fixed percentage to different funds each pay period, which helps to minimize the need to rebalance more than once a year. Large-cap stocks have had a strong performance over the past two years, which means they could be a bigger share of your portfolio than is ideal.  At the same time,  other categories like international stocks or small cap stocks may now be a smaller-than-optimal part of your account.

Move your 401(k) at your old job.

When you move onto a new job, sometimes in all of your excitement to start a new position, things can fall through the cracks. Often we find clients forget to address their old 401(k) accounts at their previous job. Your account will continue to be invested but you are no longer contributing to this plan. We usually recommend clients roll their 401(k) into an IRA. This will give you total control of your account as well as more investment options. Another option is to rollover your old 401(k) into your new company’s plan. Some plans allow this while others do not. Sometimes this type of rollover takes longer and has a few more hurdles, but some people like to have their 401(k)s consolidated in one account.

These few items will help get your plan in good shape heading into next year.