07 Nov What to Do When Your 401(k) Doesn’t Cut It
If your retirement plan needs serious help, here are 10 fixes from the experts.
Financial experts may disagree on many investing strategies, but you’d be hard-pressed to find one who won’t sing the praises of retirement plans, such as the 401(k). Yet there comes a juncture when any plan’s investment formula must be questioned, and possibly retired in favor of something better.
“Answering the question, ‘What’s the best allocation for me?’ can be daunting,” says Dirk Quayle, founder, president and board member of NextCapital, a digital advice firm based in Chicago. “So people often forgo finding the right answer in favor of the simplest solution available to them.”
And if you feel good simply because you’ve started funding an account, the dangers can be further occluded. “A 401(k) plan to the new investor is much like putting a person into the cockpit of an airliner with no training,” says Bijan Golkar, CEO, senior advisor and principal with FPC Investment Advisory in Petaluma, California. “You cannot set and forget these accounts.”
Before your autopilot 401(k) falls short of the retirement runway, it pays big to take the helm and enact course correction while there’s still time. Here are 10 solid ideas to renovate and rebuild your plan.
Use that employee match. No one would turn down free money in theory, especially with compound interest. But that’s exactly what most folks do when they drop the ball on matching retirement funds when an employer offers them. “A typical matching situation would be matching 50 percent of employee contributions for the first 6 percent of salary that an employee contributes,” Quayle says. “But many companies also offer a straight match of 100 percent up to a certain percentage.” So if you haven’t signed up for matching funds, do it now.
Make noise at work. Don’t be afraid to rock the boat when your 401(k) investment options that aren’t up to speed. “I’ll let you in on a trade secret: Plan sponsors are scared of participants,” says Brandon Grandbouche, senior retirement consultant at the WealthHarbor Capital Group in New Orleans. “Ask employers about poorly performing investments in the plan lineup. Talk to your plan sponsor or [human resources] department about issues you’ve found and potential remedies. The last thing a plan sponsor wants is litigation from its own employees under [the Employee Retirement Income Security Act].”
Put your financial advisor to work. Overburdened financial advisors may be tempted to leave your 401(k) alone for long periods of time. “My primary piece of advice is to put the advisor attached to your plan to work,” says Rodger Thomas, senior financial advisor at Hudson Point Capital in Edison, New Jersey. “Many advisors just keep the plan on their books … and forget that they have it. When I am [talking to] business owners, it’s amazing how many have no idea of the name of the advisor working the plan.”
Supplement with annuities. The 401(k) can do the heavy lifting for your retirement, but it isn’t always enough. “It’s important for people to have a comprehensive retirement that is a mixture of growth and balanced products,” says Ron Grensteiner, president of American Equity Investment Life Insurance Company in Des Moines, Iowa. Fixed indexed annuities, or FIAs, for example, have grown in popularity. “They offer tax-deferred growth and long-term returns that are enhanced compared to taxable products of similar yields. FIAs can also include riders that can help with unexpected health care costs and provide guaranteed income for life.”
Supplement with an individual retirement account. Some employer 401(k)s suffer from a lack of investment options. “With IRAs and non-retirement brokerage accounts, you may be able to compensate for the lack of diversification in your 401(k) account,” says Shomari Hearn, vice president of the Palisades Hudson Financial Group and based in Fort Lauderdale, Florida. “That way, you can get exposure to other asset classes.” Or you can forgo the 401(k) altogether, says Ned Gandevani, Master of Science in Finance program coordinator and professor at the New England College of Business. “When there’s no contribution from your employer toward your plan, there’s no need to invest in it. By investing in a restricted plan, you end up paying too much, with no benefits from your employer,” he says.
Don’t depend too much on target-date funds. This represents a twist on “set it and forget it”: Fund managers do the grunt work, while the mix of investments gets more conservative as the target date approaches. “But some target-date funds take on more risk than you would expect,” says Ara Bayindiryan (founder, Xceed Capital), financial matters consultant for Online Trading Academy of Irvine, California. He uses the example of a person who selected a target-date fund with a 2010 maturity. “You’d expect to be investing in safe options that might not pull double-digit returns,” Bayindiryan says. “But the average target-date funds set to mature in 2010 dropped 37 percent between October 2007 and March 2009. When your portfolio takes a 37 percent hit, that could mean the difference between your retiring in 2010 or continuing to work.”
Diversify across stocks. The recent run of the Standard & Poor’s 500 index has made many investors happy, but investing in that alone isn’t enough, says Duncan Rolph, managing director at Miracle Mile Advisors in Los Angeles. “Owning international stocks, as well as emerging market stocks, is a good idea, as the valuations at any given time can vary significantly.” He points to the recent struggles in Europe and emerging markets as a signal that there’s money to be made. “Allocating money to beaten-down, or more attractively valued, asset classes makes a lot of sense and can improve performance over time,” Rolph says.
Rebalance every year. That’s the majority opinion of retirement experts and portfolio managers. “You should at least rebalance your portfolio annually, just to make sure it still fits with your investment goals,” says David Twibell, president and founder of the Custom Portfolio Group in Englewood, Colorado. “If the thought of doing this reminds you of nails on a chalkboard, ask your plan’s investment advisor for help. That’s generally one of their more important duties, and they should be happy to help design the right portfolio for you.”
Get and use professional advice. Catherine Golladay, vice president of 401(k) participant services at Schwab Retirement Plan Services, cites a 2014 Schwab survey, conducted between May and June of 1,000 401(k) participants, age 25 to 75, where 70 percent of participants said they’d be very or extremely confident in making 401(k) investment decisions with professional help. That compares to only 39 percent who felt that same confidence making decisions on their own. But it’s not just a matter of feeling safe: It’s about actually being safe as well. “We’ve also found that nine out of 10 advice takers stayed the course during the 2008 financial crisis,” she says. “As a result, they were well-positioned to take advantage of a market recovery.”
Look forward, not backward. However your 401(k) performed in the past, you need to focus on the future and how your investment mix needs to change as you age. “Don’t make investment decisions by looking in the rearview mirror and basing them on past results,” says John Bucsek, managing director at MetLife Premier Client Group in Lawrenceville, New Jersey. “Rather, construct an allocation based on your risk tolerance and investment horizon, the time you reasonably expect to use the money.”
That way, you can make it to the most important horizon of all: a comfortable retirement.