There may come a time when you open your 401(k) statement and realize that your 401(k) is not doing as well as you thought it was. The reasons may vary (examples are high fees, poor investment performance, inconsistent funding, etc.), but given that your 401(k) may eventually become one of your greatest financial assets, you may want to take note of the following methods to increase your 401(k)’s value.
Get the Match
Your number 1 priority is to maximize the match your employer gives you. “You must always get the match,” says Gary Hansen, a financial advisor in St. Louis. A company match is basically free money into your retirement coffer, and that’s not something you should pass by. “Give me an investment that under performs the market by 1% a year and tell me you have a 100% company match on your contributions, I’ll be more than happy to sign on for that,” Hansen says. “If it’s a minuscule match, I might rethink it. But normally they come in flavors of 50% to 100% of contributions.”
The company match should more than justify the high fees you may be paying to have your 401(k) administered. For example, if you contributed $15,000 to your 401(k) and your employer matches 10% of your contributions, and if you received a profit sharing bonus equal to 50% of your contributions, then you would receive $9,000 in free money on top of the $15,000 you invested.
Fund Your IRA
When faced with a poor performing 401(k), an Individual Retirement Account can be your retirement strategy’s best friend. Here’s how to use it:
Assuming you are contributing enough to your 401(k) to maximize your company match, the next place to turn is a Roth IRA. You won’t get a tax-deduction upfront, but withdrawals taken during retirement will be tax-free. “The Roth is not without tremendous long-term benefits,” Hansen says. As frustrating as it may seem to hand over those extra dollars to Uncle Sam that you could have saved with a tax-deductible IRA, it makes sense to do it. That’s especially true for young folks who are just starting their careers and expect to have higher incomes in retirement.
Not only will you most likely have more retirement dollars by using a Roth, but traditional IRAs are also less appealing in this situation because many simply aren’t eligible to deduct their contributions. If you’re single, your 2007 Adjusted Gross Income (AGI) is more than $62,000 and you contribute to a 401(k) plan, you don’t qualify for a deduction. For those who are married, that figure is $103,000.
Note: If you’re not an active participant in your 401(k) plan — meaning you don’t contribute and neither does your employer — you qualify for a traditional IRA regardless of how much you make.
Both types of IRAs have contribution limits of up to $4,000 a year for 2007 ($5,000 if you are 50 or older). With a 401(k), on the other hand, you can save more: up to $15,500 this year, $20,500 if you’re 50 or older. That can be an advantage for people nearing retirement, particularly if they don’t feel comfortable with how much they’ve saved.
If your spouse participates in a 401(k) plan that’s better than yours, he or she should increase contributions to the maximum allowed, Hansen says. This way, you can choose to invest in an IRA only and without falling behind on your savings.
Make the Best of What You’ve Got
Maximizing the company match may be easier said than done if you don’t like the funds in your 401(k), so focus on damage control, Hansen says. “Try to pick the least-worst offerings.” That means choosing the funds with the best long-term performance and the lowest fees. What your 401(k) lacks, you can make up with your IRA, says Linda Carlson, a CFP in Portland, OR. “If all of the funds in your 401(k) are domestic stocks or bonds, you can use your IRA to buy emerging markets or international funds,” she explains.
Talk to Your Employer
An employer that charges high fees isn’t necessarily your enemy. If you work for a smaller company, chances are the fees are high because the accounts are fewer and account balances are lower. “Typically, when the plans are initially established, the fee structures look very onerous because there are no assets there,” Hansen says. But as these grow, the company can negotiate lower fees.
Not all companies review their retirement benefits as often as they should, so you’d need a proactive employer. According to a 2005 retirement survey conducted on behalf of Transamerica Retirement Services, a retirement plan provider, 17% of companies never evaluate retirement benefits. Of those that do, small companies are less likely than large companies to conduct reviews at least once a year.
Hansen recommends that employers evaluate and re-price their plans at least once every three years. If you don’t see your plan fees go down within that time frame, it’s time to give your employer a nudge.