Work

By Aaron and Rachel Britz

Do you recall that moment in tenth grade algebra when the final exam was placed upon your desk? Wide eyed and mystified, you look to the left and then to the right, only to return your blank stare upon the series of garbled numbers before you.

Fast forward 10 years, as you emerge into the working world, your new employer places their company’s 401(k) plan before you, tells you to complete the form, as they quietly walk out of the room with the door closing behind them. You look to the left and then to the right, returning your blank stares upon the series of investment choices, funds, options and selections.

For the average person there’s no way to tell which options to choose other than asking a friend or guessing, each providing about the same value. So your choice is to spend many hours researching it, hire a professional or just resign to having a small retirement paycheck.

While 70 percent of the American workforce participates in a company sponsored 401(k) plan, little time is devoted to education and transparency. The benefits are obvious: Tax deferred savings, a systematic withdrawal from your paycheck and most likely some company match program. The pitfalls however tend to hide behind busy human resource managers who are overwhelmed with day-to-day work, leaving little time to educate themselves in investment management, not to mention, the circulating fear that if their investment advice doesn’t work out, they could be sued. Or the financial advisor who ignores their clients largest asset, the 401(k), because it’s captivated by his/her employer, which means they can’t make commissions on trading, nor can they charge fees as a percentage of assets.

Basically, how your 401(k) plan is managed is left up to you, the investor. It could mean the difference between Ruth Chris Steak House and Perkins after a decade of retirement. For this reason, good management, on your part is essential.

Determine if your 401(K) plan is really an asset

Although you believed that the several asset choices, indicated on your 401(k) enrollment form was well-endowed, typically these selections vaguely compare to the vast universe of sectors, funds and asset classes. Without access to a broader universe of options this can potentially lead to a lack of diversification, which then results in poor investment performance.

The best way to decide if your 401(k) is worth your while is to determine your annual rate of return. Because average people are not usually knowledgeable about asset allocation and rate of return techniques, a step-by-step calculation process can be found by going to www.moneychimp.com, scroll down and click on the Portfolio Performance Calculator.

Once you’ve completed your calculation, if you discover that, for example, your 401(k) averaged 6.6 percent and the markets averaged 8.3 percent then this means that you either have a bad plan, or you chose your options poorly. Should you continue along this same unchanged course for over ten years, and then the amount of your retirement paycheck from your 401(k) could be significantly less.

If my 401(k) is performing poorly, what are my choices?

• Let a professional help you rebalance your assets. If your company’s 401(k) plan manager has the capability to provide you with an evaluation of your investment options, based on your individual investment risk and tolerance, then this is a place to start. Otherwise, a registered financial consultant in your area should be able to review your plan and help reconstruct your portfolio for a minimal fee. To find a financial advisor in your area, visit www.IARFC.org.
• If you are able, transfer your 401(k) plan into a rollover IRA. In doing so, this gives you more freedom to control your expenses and most importantly gives you access to a greater pool of better-performing investment vehicles, with plenty of asset classes to choose from.
• Take advantage of the in-service withdrawal option, if applicable. With an in-service withdrawal, you may be able to request a distribution from your 401(k) retirement account, while you are still employed, and allow your financial advisor to professionally manage your retirement account. The first step is to learn if your company allows these distributions. To do this, review your Summary Plan Description (SPD) with your financial advisor and speak with your employee benefits department. In doing so, you can learn if there are any restrictions or special requirements associated with these distributions. This sort of consolidation can lead to a more effective income retirement plan.

Making sense of your 401(k) doesn’t need to be daunting. Begin with a little investigation and determine your 401(k)’s annual rate of return. From there you can make an informed and educated choice; whether it is a simple rebalancing act, moving your 401(k) into an IRA, or, if applicable, utilizing the In-Service Withdrawal option to allow your trusted financial advisor to manage those assets on your behalf. These simple steps can help to empower you along your journey towards a confident, well-planned retirement.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.