Making the Most of Your 401k Plan

To begin, just a short primer on what a 401k plan is. In a nutshell, it's a qualified retirement plan for employees sponsored by the employee's company. Contributions, both the employees and any company matching funds, are made with pre-tax dollars (funds subtracted from the employees gross salary before tax due is computed) and are not subject, normally, to state or federal income taxes until withdrawn. Most company 401k plans provide a range of mutual funds and company stock that the employee is eligible to invest in.
The most important thing you can do to make the most of a 401k plan is to participate! And not only participate but participate with the maximum amount you can afford. If your company provides matching funds do whatever you have to do to receive them. Each percentage your company matches is like a free pay raise to you. For example, say you are contributing 10% of your salary and the first 5% is matched by your employer. Not only is that 5% like a free raise but it can also be looked at as an automatic 50% return on your 10% invested. It really is a no-brainer!
Last, many of you may be overwhelmed by the many funds available to choose from in your 401k. The most important advise I can offer is to not do what many, educated people do. And what is that? They ask a co-worker or friend what funds they are investing in. That is the fastest way to lose money and become disenchanted with your 401k. Every individual has a unique financial situation that is different from everyone else. Almost like a fingerprint! If you don't feel comfortable in researching the different options available in your plan, seek advise from a trained, financial advisor. Advisors are trained in looking at an employee's overall financial picture, analyzing the different funds/stocks available to the employee, providing unbiased guidance on what to invest in and arriving at a balanced plan. Hire an advisor who charges a one-time fee for the plan and who will provide a semi-annual to annual review to rebalance your portfolio as necessary. It will be money well spent and will pay for itself many times over. Til next time.......

401(k) Savings on the Rise

Hewitt Associates, a Lincolnshire, Il consulting firm, announced that 1/3 of all workers surveyed with less than a year on the job contributed to their 401(k) plan, an increase of 6% over 2004. Auto-enrollment, where a company automatically signs up employees, was stated as the reason for the increase. The American workforce is also increasingly relying on lifecycle funds, which are mutual funds allocated across a variety of asset classes and are geared toward a retirement date in the distant or near future. These funds grow increasingly conservative the closer the retirement date approaches. The problem I see is that Hewitt reported that almost half of younger workers gravitated to the lifecycle funds. I think that's an indication of a lack of financial education and most of these younger workers are going to miss out on gains over the long-term!! The one-size fits all approach of the lifecycle funds is why I never recommend them to clients 45 or younger. A final finding by Hewitt was that employees continue to hold too high of a percentage of their overall portfolio in their own company's stock. The benchmark I use is no more than 8-10% of an individuals overall portfolio be held in company stock. Til next time..........