Making Your 401(k) Money Work Smarter

Since 401(k) laws are changing, it will be easier for an employee to make better choices for her or his 401(k) plan. Over time, this means more money for retirement, a reward few people would deny themselves. Below are straightforward steps that can be taken to reach that goal.

The expense ratio of a managed mutual fund is around 1.20%. Index funds, which are unmanaged, traditionally cost much less: 0.2% to 0.3%. Plus, overall they perform better than managed mutual funds — partly because of those lower expenses. Only two out of 10 managed mutual funds beat their relevant index in any one year.

Find the expense ratio of your 401(k) choices. Though there are several fees including administrative, service, miscellaneous and expense ratio, the latter is the largest and most important. You can determine it by looking at your plan summary or calling the plan administrator. Compare your expense to the average cost of managed mutual funds and the traditional lower cost of unmanaged index funds. If your plan offers a lower cost equivalent with the same objectives you can switch from one to the other.

If there are no low cost alternatives, some organizations provide the option for a self-directed IRA. This means that within your company’s 401(k) plan, you can set up an account within a brokerage firm of your choosing. Then, normally you can select from among a wider menu of choices.

1. Minimize cost2. Participate in market momentum

Momentum accounts for 75% of market gain, according to recent studies. No one person can control this market energy. That means participating in the market to some degree or another at all times is important no matter what your age.

Asset allocation accounts for about 10% of portfolio gain. This can be controlled by the 401(k) plan participant.

Understand asset allocation fundamentals. This means spending some time independently or with a plan representative or using another option to aid understanding alternatives.

If you are younger with a steady job, you can engage in the market, rather than safer alternatives, with up to 90% of your available monies; basically whatever your comfort level allows. Older individuals near retirement most often have a much more conservative portfolio, some with 75% in safer alternatives depending on their situation. The proportion of stocks verses bonds should be discussed with a representative from the 401(k) plan to suit age and risk tolerance.3. Implement asset allocation

Do your homework

To find out how the above steps can help you, go to the Thrivent 401(k) calculator website to compare the effect of two different expense ratios will make on your total monies available at retirement.

Determine your expected return; usually 8% is acceptable. Deduct your current expenses from the expected return; for example, if they are 1.5%, deduct that from 8% for a 6.5% return. Insert that figure as your annual rate of return rather than 8%. Then, complete the form and record the total available to you at retirement.

Finally, repeat the process using lower expenses, for example 0.3%. That would bring your return to 7.7% (8% - 0.3%). Now figure what you will make and compare to the earlier higher expense return. The different between the earlier figure and this one is the excess money you will have at retirement due to lower expenses, all else being equal.

Contain Expenses to Increase Returns

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Further Reading:

More Money Projected for 401(k) Investors

This information and content is offered for informative and educational purposes only. MyMoneyMD, LLC is not acting as a Registered Investment Advisor, Investment Counsel, Tax Advisor or Legal Advisor.