You've been diligently putting money away through your
company's retirement plan, and are hopeful that the mutual funds in your 401(k)
will accumulate enough cash for you to retire comfortably someday. But how do
you know if your account is performing as well as it could? An underperforming
401(k) can cost you thousands of dollars in retirement income, so it's
important to understand where it may be lacking. Here are seven ways to tell if
your 401(k) is not up to snuff.
1. The Underlying Indexes Are Performing Better
You may have your 401(k) invested in funds that are meant to
mirror certain indexes, such as the S&P 500 or Russell 3000. In general,
your overall investment returns should be in line with these indexes. If they
aren't, then you may want to evaluate what you are paying in fees (see below),
or consider switching to a fund that is better managed.
2. You've Never Rebalanced
You may think you have the ideal investment mix, but it's
important to remember that your original investment choices may have shifted in
proportion over time due to your portfolio's growth. For example, let's say you
decided to place 60% of your money in domestic stocks, and 40% in
international. But if domestic stocks grow more quickly, over time, that may
turn into a 70/30 split. Reallocating your existing investments to reflect your
investment choices will usually help you achieve greater growth.
3. You Pay a Lot in Fees
Many people don't realize that most 401(k) plans come with
fees. There are fees to administer the plan, fees to manage the funds, fees for
record keeping, and a variety of other things. Generally speaking, fees should
not represent more than $1 for every $100 in your account, or a total of 1%. If
you are primarily invested in index funds, anything more than .20% is high.
Even the slightest fee can represent thousands of dollars in lost savings over
the life of a plan.
4. Your Plan Administrator Uses Only Its Own Funds
If the company administering the 401(k) plan insists on
offering only its own funds, that could be a problem. Those funds might be
fine, but studies show they are often not the best funds available and
administrators are less likely to dump those funds when they underperform.
5. You Aren't Getting the Maximum Match From Your Employer
If you're not certain what percentage of each paycheck to
put into your 401(k), you should at least contribute the minimum required for
your maximum company match. This amount varies, but it's often between 3% and
5% of your salary. If you don't take advantage of the company match, you're
leaving free money on the table.
6. You're Trying to Time the Market
One of the best things about 401(k) plans is that money is
usually deducted straight from your paycheck, so you can contribute a
consistent amount into specific funds without much work. But if you decide to
adjust your contributions according to market fluctuations, you might be
messing with a good thing. Trying to time the market is rarely effective. The
average 401(k) investor hangs on to investments for about three years, when they
should be staying the course for at least five.
7. You Live in the South
If you live below the Mason-Dixon Line, you might find that
your 401(k) is a little sluggish. According to BenefitsPro, six of the top 10
states with the most underperforming 401(k) plans are located in the
south. This includes Alabama, Mississippi, Tennessee, South Carolina, Georgia,
and Florida. In many of these states, more than 10% of all plans were
considered low performing. Check with your HR department or plan administrator
for a better understanding of your investment choices.
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