Grow Your 401(k) Plan
Your 401(k) plan's ultimate size is primarily
a function of two factors - how much you contribute and how much
you earn on those contributions. You know you could contribute the maximum amount possible ($16,500 in 2009 plus a
$5,500 catch-up contribution for individuals age 50 or older, if permitted
by the plan). But what steps should you take to maximize your
returns? Consider these tips:
- Take advantage of employer-matching
contributions.
Contribute at least enough to take
full advantage of any matching contributions. You simply lose the money if you don't use it. A 50% match on your contributions
is the equivalent of earning 50% on your money in the first year.
If you plan to contribute the maximum and your employer matches
contributions, have the $16,500 taken out of your pay uniformly
throughout the year. Most employers match your contributions
as they are made, so you could forego some matching if you reach
the limit before year-end.
- Select your investment
alternatives carefully.
Since you are responsible for investment
decisions, understand all alternatives and review all available
information before making choices. Keep in mind the long-term
nature of your retirement goal and select investments for that
time period. For most participants, despite the substantial declines
in the stock market over the past couple of years, that will
mean that a significant portion of their portfolio should be
invested in growth alternatives such as stocks.
- Rebalance periodically. Numerous
studies have found that rebalancing reduces portfolio volatility,
often with increased returns. By rebalancing, you are following
a fundamental investment principle - you are buying low (those
investments that are underperforming) and selling high (those
investments that are performing well). Keep in mind that you
set your asset allocation strategy because you believed those
were the appropriate percentages of various investments that
you should own. Thus, you need to make rebalancing a habit so
your portfolio doesn't become more risky than intended. Since
your 401(k) plan is tax deferred, there are no tax ramifications
to buying and selling within the account.
- Limit the amount of
company stock owned.
Purchasing too much company stock is
risky. Not only is your job and livelihood tied to the company,
but your retirement savings are also tied to that same company.
It is generally recommended that any one stock not comprise more
than 5% to 10% of your portfolio's value. If you own company
stock in your 401(k) plan, look at how much of your total balance
it represents. Take steps to immediately reduce that percentage
if it is over 10% of your total portfolio.
- Don't borrow from your
401(k) plan. While it may be comforting to know you can gain
access to your 401(k) fund when needed, only borrow as a last
resort. It's true that you are borrowing from yourself and will
pay interest to yourself, but there are also hidden costs to
this borrowing. When you borrow, some of your investments are
sold. While your loan is outstanding, you miss out on any capital
gains or other income those investments would have earned. Interest
rates are typically very reasonable with 401(k) loans, often
prime rate or a couple of points over prime. That makes it easier
to pay back the funds but could mean your 401(k) account is earning
lower returns than if it was invested in other alternatives.
Also, if you leave the company while a loan is outstanding, you
must repay the entire balance within a short period of time or
the loan will be considered a distribution, subject to income
taxes and the 10% early withdrawal penalty if you are under age
59 1/2
(55 if you are retiring).
[PRINTER FRIENDLY VERSION]
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