Wealth Management & Financial Planning

Wealth Management & Financial Planning

Four Guiding Thoughts for Your 401k

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Participants in 401k plans must consider many choices such as what percentage of earnings to save, whether to select a Roth option if it’s offered or a traditional tax-deferred IRA, and what plan investment options to select

Many participants consider their options once and then place their 401k on auto-pilot. But a one and done strategy isn’t wise when it comes to planning for life after work.

The four guiding thoughts for individuals participating in defined contribution plans (where individuals save their own dollars rather than receiving a monthly pension at retirement) are:

1.) navigate market risk and volatility.
2.) control fees and expenses where possible.
3.) pay attention to taxation both for the current year and upon retirement.
4.) make the best choices to get a real return.

The four criteria above are also supposed to guide the thoughts of a legal fiduciary. Plan providers attempt to help individuals manage their risk and volatility with the use of target dated funds. Target dated funds may be better than nothing for a novice, but they come at an additional cost to the employee.

Each plan has a fiduciary assigned to act in the best interest of the plan’s aggregate investors, but not each individual participant. The fiduciary team or person is given the task of selecting the custodian and the corresponding investments that are offered. The fiduciary focuses on the fees and expenses but the rest is really up to participants.

Purdue University recently sent an update to 401 participants notifying them they were able to negotiate reduced fees inside of the target dated options. Good for the Boilers! They are doing their job.

Purdue also made the decision to replace the PIMCO Total Return Fund with another fund. Investors in the university’s defined contribution plan have no choice but to move money from the PIMCO fund into another fund. The decision to remove an option saddles participants with new choices when it comes to their plan options.

This is an ideal time to sit down with a professional fiduciary and ask a few very important questions. Based on your past experience, current circumstances and future hopes and desires (yes, I borrow that from Andy Stanley as I think it is great wisdom for all decision making), consider what choices would be wise for you at this time.  In other words, should your allocation mix change based on risk and market volatility and perhaps your proximity to retirement? Is your tax decision (to select a Roth or traditional tax-deferred IRA) inside your retirement plan really right for your current and anticipated circumstances? Should you increase or even potentially decrease the percentage of income you are saving?

Life happens, things change and the majority of the time the impetus falls on investors to recognize that life changes require investment changes. You only get one shot at retirement. Do yourself a favor and have a meaningful discussion with a fiduciary focused on your future not just options in the plan.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]

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