401k Help

Most folks need 401k help. Upon hiring, all of a sudden you're supposed to be some kind of investing genius. You were probably asked to answer the following questions before signing on with your present employer:

  • Do you want to make Roth 401k contributions or pre-tax contributions?
  • What percentage of your pay do you want to contribute?
  • How do you want to invest your contributions?

In response to that last question, you were presented with a list of investment choices from which you were supposed to choose. Unless you are an investing genius, you had better get some 401k help!

Don't worry. I'll explain how to come up with a great 401k retirement plan using your employer's choices, and I'll do it in easy to understand language.

By the way, if you have a 403b vs 401k457, 401a, or other type of defined contribution plan instead of a 401k, the investing principals presented here will work just the same. In most cases the differences in these plans is in name alone.  [401k definition]

401k Help MUST-DOS

  • Contribute a nice hunk of your yearly gross income into your 401(k) every year
  • Take the time to understand how investments work
  • Come up with an effective investment plan with low expenses
  • Stick to your plan through good times and bad

Divert a good hunk of money every year to your 401k

Try and save as much money as possible to your retirement goal every year, up to the 401k contribution limit if you can afford it. This is the most important part of your 401k help. Remember, a successful retirement plan has more to do with savings than it does with investing.

Tax advantaged plans like your employer’s 401(k) allow you to contribute more per year than other plans, so try and save up to the 401k contribution limit if you can, regardless of whether you’re offered a match.

401k problems like poor investment choices and high fees are less common since the passage of ERISA and the Enron debacle. If you’re unlucky enough to have one of these dog plans, take your match (if any), and use other tax advantaged plans like a Roth IRA or Health Savings Account to save for retirement.

Even if you're offered a Roth option in your 401(k), it may be wise to open up and fund a Roth IRA in addition to your 401(k) contributions (see Roth 401k vs Roth IRA).

Understand how investments work

If you invested in stocks in the past and expected to make a bunch of money in just a few years, there’s a decent chance you were sorely disappointed. Investing in stocks for the short term has proven in the past to produce mixed results.

On the other hand, no investment has proven to be a better investment than stocks when investing for the long term. That’s why the longer your time horizon for investment, the bigger percentage of money you want to dedicate to stocks.

As time passes and your horizon shrinks, prudence dictates that stock percentage needs to drift lower. I call this your dynamic stock to bond ratio, which makes your 401k retirement plan slightly more conservative every year.

That way, a big stock market downturn won’t put the kibosh on your retirement plans. By then you’ll have plenty of money in safer bonds and you'll be able to afford to wait out the downturn.

A low cost and effective investment plan

Unless you’re a sophisticated investor who’s willing to put in a lot of time into their investment plan, you’ll be investing in stocks and bonds via mutual funds. In most 401k type plans, mutual funds are your only option.

Even though mutual funds come with some degree of management, you still need to do some research as to which mutual funds to choose. Look at performance and expenses. Don’t just check year-to-date and one year returns. Look at the fund’s returns are over a longer term: 3, 5, 7, and 10 years if the fund has been in existence that long.

If your employer offers index mutual funds, most often these will be your best choice. History has shown it's tough to beat a diversified portfolio of index funds in the long run. Your investing expenses will be super-low when compared to actively managed funds, and most index funds outperform their actively managed brethren year in and year out despite those higher costs. [Follow this off-site link to NerdWallet for a discussion on active vs index mutual funds.]

Diversifying portfolio allocations is another recommended risk management strategy and is easy using mutual funds.  By choosing the proper mixture, you can diversify with small, medium, and large companies, dividend paying and growth companies, as well as domestic and international holdings.

Once you're done diversifying your portfolio allocations per your dynamic stock to bond ratio, you can put your 401k retirement plan on autopilot for the next year. Keep feeding it payroll contributions, and make sure each contribution streams to the proper mutual funds in the proper percentages.

Once a year you must re-balance and reassess your dynamic stock to bond ratio. Take the time to schedule these important tweaks to your 401k retirement plan at a time you'll remember, like tax time or your company's open enrollment period.

Sticking with your plan through thick and thin

The hardest thing you’ll have to do is to stick to your investment plan, even when the stock market is on its way down and you might be losing thousands.

Your investing success, however, rests on resisting the urge to bail on your 401k help. Please heed this very important 401k investment advice.

Your payroll contributions during those down times buy stock at bargain basement prices. When the stock market recovers (so far it always has), those investments will give you the biggest bang for your buck.

Think of market downturns as buying opportunities. In fact, next time the stock market is down 10 plus percent, consider temporarily increasing your contribution percentage and investing even more money into your plan.

Think there won’t be any double digit stock market downturns between now and when you retire? Think again. Historically, there have been over a dozen of them since 1926 (as measured by the S&P 500 index). You’ve got to be mentally prepared for the next one so you won’t bail on your plan.

401k Help When You Need it Most

Devising an investment plan for your 401k is not rocket science, but you do need a plan!He really is a rocket scientist!

See, coming up with an effective 401k retirement plan is not rocket science.

You can do it yourself. Keep things simple, your costs low, stick to the plan, and don’t fret over those inevitable market swings. That's the best 401k help I can offer.