By my estimate if you stayed in the market through the recent turmoil the value of your 401(k) account is probably getting close to where it was a year or so ago. But remember, you’re only back to where you used to be, not necessarily where you need to be. So don’t pat yourself on the back just yet. Here are three simple things you can do to fix your 401(k)
1 Make sure your asset allocation lets you sleep at night. The percentage of your money that you put into different investment types either increases or reduces your account’s market risk. If you were 70% stocks and 30% bonds before the market drop, and you didn’t like the rollercoaster ride, adjust your percentages so that you don’t have to relive that experience. Research shows that many investors owned more stock mutual funds, i.e., had more risk than they realized when the market began its precipitous fall in 2007. Interestingly enough, research also suggests that almost 80% of people haven’t made any changes to their investment choices during this up-and-down period. That means if you were overweighed in stock mutual funds then, you’re probably overweighed now.
2 Be aware of overlap. Simply put, people who invest in two or three of the same kind of mutual funds and, contrary to what they believe, may actually be reducing the amount of diversification they’re getting. Look at popular retirement plan funds such as Fidelity’s Contra Fund and American Fund’s Growth Fund of America for example. Two out of their top five holding are the same and their sector weightings are nearly identical. So why would you want to be in both? You don’t, not to mention the fact that one costs more than the other. The good old days of simply picking a bunch of funds based on their rate of return doesn’t pay in today’s environment
3 Your retirement plan costs money! Most people think investing inside their company retirement plan is free. But it’s usually not the case. Every investment has a cost (referred to its expense ratio). In most plans those costs are passed along to you. So it’s important to start asking questions and determining if you have a high cost or low cost provider. Don’t be surprised if your boss or HR person doesn’t know how much the plan and funds cost. People need to wake up to this industry secret. If you are tightening your budget at home and work, you should expect the same from your plan provider.
One More INSIDER SECRET: Most retirement plans offer fewer investment choices than are available to that plan. The reason? Research shows that the fewer options available, the more likely people will participate in the program. The problem? You may not be offered low cost options like index funds or the ability to participate in some asset classes essential to accumulating true wealth and diversification like technology, gold, precious metals, or real estate.
Now what? You’ve inevitably read articles like this before and now you’re faced with the tough question: What do I do with this information? Here’s the answer! Go online to your account or grab your last statement. Take a look for the things I mentioned in the article and if you find yourself feeling frustrated or with additional questions than pick up the phone and call 517-219-3241 – it’s my direct line. Whether you’re an employee or executive who needs help figuring out your retirement investments, or if you’re a boss or HR director who wants a third party to help you understand your plan, just dial 517-219-3241… or simply reply to this email with the subject HELP!.
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Robert Laura, AAMS, CMFC, CRPC: Robert Laura is co-founder and partner at SYNERGOS Financial Group. He is the author of Financial Karma and The Five Most Important Financial Things They Don’t Teach You In School. He is frequently highlighted in local media and has been quoted in Smart Money Magazine, Forbes, The Street.com, Journal of Financial Planning, Bank Investment Advisor and a host of other media sources