The Alert Investor

401(k)

It’s Time For Your Annual 401(k) Checkup

Feb 07 2017 | By Phyllis Furman

The New Year is here. As you consider your resolutions and goals for the year, consider this: examining your 401(k).

“It’s important to periodically check on your 401(k),” said Christine Benz, director of personal finance at Morningstar. “The beginning of the year is a good time, but feel free to schedule it anytime” of the year.

To kick off this healthy habit, here are five things to look for during an annual 401(k) “checkup.”

1. Consider bumping up your savings

You might have enrolled in your 401(k) plan a while ago at a low contribution rate. Have you increased your savings since then?

A recent survey by the Transamerica Center for Retirement Studies found that 401(k) plan sponsors who automatically enroll their employees into retirement plans have a median default contribution rate of just 3 percent of an employee’s annual pay.

In contrast, many experts recommend that employees aim to set aside much more— around 15 percent—of their pretax income for retirement. If that’s a stretch, consider contributing at least enough to receive any available match from your employer.

A retirement calculator, like this one from FINRA, can help you see if you’re on track to meet your retirement savings goal.

The contribution limit for a 401(k) for 2017 is $18,000, with an additional “catch-up” contribution of $6,000 open to employees age 50 and older.

2. Revisit your asset allocation

Markets go up and down, and life circumstances change. It’s important to see if your current asset allocation is still appropriate for your age, your goals and your tolerance for risk. Asset allocation helps you diversify your portfolio. Financial advisors generally suggest investors diversify not just among asset classes (between stocks and bonds, for instance), but also within a given asset class (not just investing in large-cap stocks, for instance, but also in medium-sized and small-cap companies).

It’s also important to rebalance your portfolio periodically to bring your asset mix back on target. Assets grow at different rates—that means that your portfolio might end up out of line with the allocation you have chosen. You’ll also need to reconsider your goals, from time to time, to determine if you might need to adjust your allocation targets.

3. Check out new options

Fashions change and so might your options for saving for retirement.

One increasingly available offering is a Roth 401(k). A survey by consulting firm Willis Towers Watson found that the percentage of plan sponsors offering Roth 401(k)s was 54 percent in 2014, up from 46 percent in 2012.

A Roth 401(k) is similar to a Roth IRA. You pay taxes now on your contributions, but your withdrawals in retirement are tax-free. In contrast, with a traditional 401(k), you contribute pre-tax dollars, but you pay taxes when you take your money out.

If your 401(k) plan offers a Roth option, take some time to consider if it might make sense for you.

“Think about your tax rate today vs. where you expect it to will be in retirement,” Benz said. If you believe you will be in a higher tax bracket down the road, than a Roth 401(k) might make sense.

But it doesn’t have to be either/or.

“Most plans will allow you split your contributions between a Roth 401(k) and a traditional 401(k),” Benz said.

4. Scrutinize your plan’s fees

Your 401(k) plan isn’t free. There are costs involved, from the fees charged by your retirement plan’s record-keeper to mutual fund expenses. There may also be fees involved when you re-allocate funds from one investment to another. As these fees build up, they can take a bite out of your returns.

Your employer is required to disclose these fees on an annual basis. Your annual 401(k) check-up is a good time to learn about fees and possibly change your investment choices.

5. Update your beneficiary designations 

Your life may have changed over the course of the past year. Did you get married? Have a baby? Or get divorced? There are a number of reasons you may want to update your 401(k) beneficiary designations.

Think of this task as a gift to your loved ones. By updating your beneficiaries you’re making sure that your retirement account goes to people of your choosing after you’re no longer here.

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