Wednesday Welcome: Three Steps to Maximize Your 401(k) - Jean Chatzky - Making money make sense
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Wednesday Welcome: Three Steps to Maximize Your 401(k)

This week we welcome Roger Wohlner, an Illinois fee-only financial advisor and blogger at The Chicago Financial Planner. Since I met Roger at the FINCON blogging conference last year, he’s become a frequent source of mine when I’m reporting a column or television segment. I asked him to bring his wisdom to you today. Below, he offers some tips for making the most of your 401(k) plan.

indexThe financial press carried numerous stories during the financial crisis about the evils of 401(k) plans — in several cases it was referred to as a “201(k).”  There are many lousy 401(k) plans out there, but there are also many excellent ones as well.  Here are a few tips to help you maximize the benefit of your workplace retirement plan.

Get started.  This might seem intuitive, but you can’t benefit from your employer’s 401(k) plan unless you are participating.  If you haven’t started deferring a portion of your salary into the plan, this is great time to start.  Look at your budget, determine how much you can afford to defer each pay period and as the Nike folks say “…just do it…”  Many plans allow you to do everything online. Otherwise, contact the plan administrator at your company.

What if you are self-employed?  There are a number of retirement plan options to consider including a Solo 401(k).  The same contribution limits apply and most major custodians (Schwab, Fidelity, Vanguard, TD Ameritrade, etc.) make it easy to start a plan.  If you don’t have a retirement plan in place for yourself, do this today.  You work way too hard not to be putting something away for retirement.

Take charge, don’t just default.   Target Date Funds are offered by many 401(k) plans and are often the default option for those participants who do not make an investment election.  While TDFs may be fine for younger participants with little or no investments outside of their 401(k), I’m not a huge fan for those of you within say 15-20 years of retirement.  If you are in this situation, consider an allocation that is more tailored to your unique circumstances. [Note from Jean: If you’re unsure how to select an asset allocation, Money School’s Simple Investing class, taught by guest instructor Tim Maurer, will guide you. It’s a live course on May 6.]

Defaulting also refers to the amount you have deferred from your salary each pay period.  Many plans use auto enrollment for new employees who do not make an election to contribution.  The default rate of deferral is generally in the 1% – 3% range, likely not enough to allow you to reach your retirement savings goals.  Make an election you can afford, but you can likely afford more than you think.  At a minimum you will want to defer at least enough to earn the full match if your employer offers one.

Plan, consolidate, and coordinate.  Your 401(k) plan can be a great retirement savings tool.  However, when looking at accumulating a retirement nest egg, your 401(k) should be viewed as a piece of the pie.  The other pieces might include old 401(k)s, a spouse’s 401(k), IRA accounts, taxable investments, and the like.

A financial plan should be the basis of your retirement planning efforts.  As an outgrowth of your plan, it is important to view your 401(k) account as part of an overall investment portfolio, even if the 401(k) is the largest component.  Your 401(k) allocation should be a part of the overall picture and not done in a vacuum.

As an example, perhaps your plan offers a limited number of solid investment choices.  In this case you might consider focusing your contributions into just a few of the choices offered and using other investment accounts to round out your overall asset allocation.

A 401(k) or similar company retirement plan can provide an excellent path to saving for your retirement.  Make sure that you are maximizing this employee benefit.

About Roger: Roger Wohlner is a fee-only financial advisor based in Arlington Heights, IL. He provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations and endowments. Roger is active on Twitter (@rwohlner), LinkedIn, Google+, and is a contributing blogger for US News.  Check out Roger’s popular financial blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments and retirement plans.

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