How To Make Your 401(k) Plan One Of The Best

Shutterstock

I recently read this article about how to know if your 401(k) plan is one of the “best.” It suggests the key things to look for are index fund options, cost-efficient target date funds, investment advice, feedback on how you’re doing, retirement plan calculators, an understanding of your plan among employees, and support from company management. That makes a lot of sense to me, but what if your plan is missing one, several, or even all of those elements?

First, don’t make the perfect the enemy of the good. If your 401(k) lacks a lot of the features of the “best” plans, keep in mind all the benefits that it does have such as tax deferral or tax-free growth, the convenience of payroll deduction, and protection from creditors. Your plan may also offer free money in the form of a match. You probably don’t want to give up those benefits by investing in a taxable account or even worse, not saving for retirement at all. Second, there are ways of turning a sub-optimal plan into one of the best.

1. Understand ALL the options available to you.

If you have a self-directed brokerage account option, you’re in luck. This feature allows you to invest in funds and in some cases, even ETFs and individual stocks, that aren’t part of the core investment options in your plan. If your plan doesn’t offer index funds or low cost target date funds, you can probably find them here. In fact, companies like Vanguard, Charles Schwab, Fidelity, and BlackRock all offer low cost target date funds that are composed of index funds. This is important since low fees have been found to be the “most proven predictor of future fund returns.”

If you don’t have a brokerage option, see what the funds in your plan cost. You’ll want to look for the fund’s expense ratio, which can generally be found on the plan website or at least in the fund prospectus. An expense ratio of 1.4 means that the fund charges about 1.4% per year so the lower the number, the better. Even if none of your funds are index funds, they may still be relatively low cost since 401(k) plans often offer institutional funds with below average fees.

If most of your fund options have high fees, it doesn’t mean you should abandon your 401(k). The tax breaks can still outweigh the advantage of lower cost funds in a taxable account. At the very least, you’ll probably want to contribute enough to get your employer’s match. After that, you can choose low cost funds in an IRA and an HSA (if eligible) before investing more in your 401(k).

If you have investments outside the 401(k), you can use your 401(k) for the investments where you have low cost options and use your outside account(s) for the rest. Just make sure that you’re comparing the cost of similar funds to each other since being diversified is more important than always picking the lowest cost funds. This brings us to…

Let's block ads! (Why?)

https://www.forbes.com/sites/financialfinesse/2018/07/08/how-to-make-your-401k-plan-one-of-the-best/