Last Updated on
Here's a guest post by fellow PF blogger PT Money (aka Phil Taylor) who started blogging since 2007 and has a limit-less site talking about saving money, debt reduction, and living a frugal life. I thought I would include his post on 401K's because I wanted to learn more about the US counterpart of the RRSP. I picked the photo to the left, by the way.. so it in no way reflects the thought-process of PT Money. 🙂
I love the company 401K.
It makes retirement savings easy. It's automatic at most companies. But it's not the perfect tool for retirement savings. It could be improved. Luckily some of the improvements can be made by you.
Here's some advice on making the most of your 401K.
1. Try to reduce fund fees.
The choice of funds within a company 401K are often limited by the 401K administrator. It's easier for them to manage a 401K if it has fewer funds. But fewer funds means you're more likely to be stuck with expensive investment options. Pay attention to the fund expense ratios and factor that in when making fund choices. A great website that can tell you more about the fees within your 401K is brightscope.com. Use them to compare your 401K with other companies. Show it to your human resource department. Start a campaign to improve your company's 401K fees.
2. Set up a proper asset allocation.
Another thing you could do is to take a look at your retirement account asset allocation . Are you investing your money according to your risk tolerance and time horizon? There is no exact science to this, but you want to at least be comfortable with your allocation. Putting all your eggs in one basket (i.e. company stock) can leave your retirement susceptible to too much risk. An easy way to instantly improve your allocation is to consider a target-date fund. Not perfect by any means, but they will at least get you to a baseline of allocation.
3. Create an automatic contribution increase.
A nice feature that most 401Ks are adapting these days is an automatic annual contribution percentage increase. For example, you automatically contributed 3% from your paycheck last year, and this year your company automatically bumps that up to 4%. This will help to ensure you invest you raises each year. And trust me, once you start investing for retirement automatically, you'll realize that you don't really miss the money. Bumping contributions up by a percentage point won't hurt. But it will definitely happen if you make it automatic.
4. Make sure you get the company match.
There's free money to be had for investing in your company 401K. Most companies will match a percentage of your contributions with their own money. If you aren't currently getting the full matching percentage, make sure you step up contributions so that you do.
5. Turn it into an IRA.
Finally, if you are leaving your job, or you recently left, consider rolling your 401K over into an IRA. Doing so will likely give you access to funds with lower fees. It will also give you more investment choices. The process is simple and tax-free if you roll it over according to IRS rules. Phil Taylor is the creator of PT Money: Personal Finance. Follow PT as he write about saving more money and gives tips for using the best 0% balance transfer credit cards available today.