Five things to know and do AFTER you’ve enrolled in a 401(k)

You’ve enrolled in your company’s 401(k) program. You got the ball rolling, so now what? In a previous article we gave some pointers about right-sizing your involvement and getting help from a professional. But you still have questions.

Financial planning has many layers. Let’s peel back some of those layers and address five important points.

Revisit asset allocation frequently
Proper asset allocation is a fundamental component of a successful investment strategy. The question often asked is, “How often should asset allocation be reviewed?” My advice is twofold. First, you should revisit allocation at least once every year. Second, it should be done with the guidance of the retirement plan advisor or your personal financial advisor.

When I meet with plan participants, we discuss several factors, like time to retirement, risk, and the benefits of asset allocation. This communication is vital to set and maintain expectations especially through times of market volatility.

Target-date funds are not for active participants
Some features of retirement plans are designed for people who wish to take a passive or hands-off approach. Target-date funds, also known as age-based funds, are by far the most popular QDIA (Qualified Default Investment Alternative) in retirement plans. They offer the convenience of not having to stop to make decisions along the way.

That convenience, however, is not what the active investor is looking for. Default by definition implies that the investor wishes to remain uninvolved. There are far better options for those who want to be more hands-on, even when enlisting the help of a professional.

Taxable investments can be used to supplement
Because 401(k) options are limited, I am sometimes asked about how to use taxable investments to make up for shortcomings. There is no “one size fits all” answer to this question, except to say that several points should be considered. Current income, expected future income, near term goals, retirement goals and risk tolerance are all pieces of the puzzle.

Optimize as a couple, rather than individually
When couples have 401 (k) plans with two different employers they should coordinate and optimize each plan in light of their joint long term goals. Employee plans are not all created the same. Each employer has different options and sets of rules. Spouses can make the best use of their individual plans, taking advantage of the most appropriate pieces of each.

A qualified financial planner will help a couple evaluate their options and how they fit into the overall plan. By coordinating the two plans, the whole becomes more effective than the sum of its parts.

Take Paul and Lauren for example. Paul owns a business that doesn’t currently have a retirement plan. Lauren is a nurse at a large hospital with a great 401(k) Plan. As a couple, they make over $200,000. At this income level, neither can save into a Roth IRA or a deductible IRA. It is the most appropriate for Lauren to maximize her 401(k) savings to decrease taxable income as a couple.

I left my job, what should I do with my 401(k)?
The Department of Labor is discussing this topic right now. The discussion revolves around the cost of the 401(k) plan vs rolling into an IRA with an advisor. There are internal fund expenses, administration costs, and advisor fees which need to be taken into account. As a participant, you need to evaluate all of the fees associated with your current retirement plan and an IRA. In some cases, an employer pays for the plan expenses out of pocket, making the overall retirement plan expenses low for the employee. If you are working with an advisor, ask them to provide an illustration of current costs inside your retirement plan vs proposed costs in rolling into an IRA.

While there are many things each individual should consider when managing their 401(k), these common points are key to get you started. A financial advisor can help you analyze your particular situation, goals, and risk tolerance to help you make educated decisions, and create a workable plan to help you accomplish your financial objectives.