Managing Your 401K PlanHR Resource
July 26, 2012 — 1,632 views
For a majority of hardworking Americans, 401k investment is their biggest source of retirement savings. This option has replaced traditional employment pension options and puts the responsibility for saving in the hands of the employee. An employee who takes control of his or her 401k plan and understands how to manage the account can better plan for his or her future retirement. That means, for many Americans, it's time to get familiar with how 401k investments work and what can be done to improve the worth of these accounts.
Here are four tips to help employees take advantage of their 401k plans.
1.) The match - Employers often offer to match part of contributions invested into 401k accounts by employees. This is important for employees to understand because, for each dollar that they invest, the company they work for will match the investment - it's free money, in essence. However, these matching fund policies can be confusing, so employees are advised to speak with their human resources department and ask for a run-down of the processes involved in 401k investment matching.
2.) Asset Allocation - The average American is confused about at least one aspect of his or her 401k plan. When determining what stocks or bonds to invest in, an employee should look at the entire picture and make sure he or she understands all available options and works with plan sponsors.
3.) Invest wisely - The more diverse a portfolio is, the more likely the investor will find greater success. In some instances, 401k plans have limited investment options, which can prevent employees from planning most effectively for their retirement. Therefore, it's suggested that employees also set up additional investment plans outside of the 401k to better account for potential bumps down the road.
4.) Expect fees - All 401k plans come with attached fees. These costs can be related to administrative reasons, investment management duties and trust custody expenses. Typically, these payments are split between the employee and the employer, but it's important for the investor to realize that there will be predictable costs, so it's essential to plan for those fees well in advance. Many 401k plans feature funds with high expense ratios, but investors can lower costs by finding index funds with affordable cost options.