Time to Give Your 401(k) a Checkup

By giving your plan a checkup now, you may be able to trim this year’s tax bill as well as improve your odds of reaching your retirement goals over the long term. Here are five simple steps to take:

Don’t overreact to the recent investment losses. Granted, the market drop hit even well-diversified portfolios, such as target-date retirement funds. For example, the Fidelity 2025 target-date fund, geared for those retiring in three years, has given up 15 percent so far this year, and the Fidelity 2055 fund, designed for 30-somethings, dropped 18.1 percent.

Despite that, your overall balance may have grown because of those steady automatic contributions. And over the long term, the average target-date fund has delivered solid gains. The Fidelity 2055 fund, for example, has returned an average annual 8.6 percent over the past 10 years.

“Remember, you’re a long-term investor, so you will experience many market cycles over the next decades,” says Christine Benz, director of personal finance at Morningstar.com.

Your best strategy is to make sure your financial plan is up to date. If you haven’t reviewed it since you began saving, a lot may have changed. Perhaps you got married, changed jobs, or plan to retire soon. That may mean your financial goals as well as your asset mix need to be adjusted. 

If your spouse has a 401(k), make sure both portfolios are in sync with your overall asset mix. You can use the plan’s tools to evaluate them. If you have old 401(k)s in former employer plans, consider consolidating them.

The typical 401(k) saver puts away about 7 percent of pay, according to Vanguard. But as a study by Boston College’s Center for Retirement Research found, the typical household needs to save about 15 percent of pay to provide enough income to live comfortably in retirement. (That amount can include employer matching contributions.)

“One of the most effective ways to save is to max out contributions to your employer plan,” says Maria Bruno, head of U.S. wealth planning research at Vanguard. The 2022 annual limit for employee contributions is $20,500 ($27,000 if you’re age 50 or older and your plan allows catch-up contributions).

If that’s too daunting, at least put away enough to get the full matching contribution from your employer, which is typically 50 percent of the first 6 percent of pay. You can gradually raise your contribution rate by 1 or 2 percentage points each year or whenever you receive a raise.

It may cost a bit less than you think to save more. If you earn $60,000 and kick in 10 percent of your salary, your weekly paycheck will be reduced by $115. But if you’re contributing pretax, you also cut your federal taxes by $25 each week, assuming a 22 percent tax bracket. So the true cost of your contribution is just $90 once you factor in that tax break. (To see the tax impact of raising your contribution, try Vanguard’s retirement savings calculator.)

In the past, major market moves may have prompted you to rebalance your asset allocation, but that may not be the case this year.

“Stocks have fallen a bit more than bonds, but the fact that both have fallen makes rebalancing a bit less crucial than would be the case if just one asset class had fallen,” Benz says. 

In fact, the best response in this kind of market environment may be to sit tight and do nothing, which can help you avoid overreacting to market swings, according to Benz. That’s especially true if you started out with a reasonable asset mix.

But if you intended to adjust your allocations anyway—perhaps adding more bonds as you near retirement—it’s easy to do. Just shift enough money from your stock funds to your bond funds to reach your ideal asset mix. Your 401(k) plan may even offer an online rebalancing tool that will do this for you. Or you could switch to a target-date fund, which will give you all-in-one diversification and do your rebalancing automatically.  

Many 401(k) plans now offer more low-fee investing options than before, including index funds and institutionally priced (read: cheap) investment funds. But if you’ve been investing for more than a few years, you might hold a portfolio that includes actively managed funds, which often levy higher fees. Lowering your expenses is the simplest way to increase your returns, Benz says.

So look for the most reasonably priced 401(k) funds in your plan. In large company 401(k)s, funds typically charge less than 0.5 percent. But you can probably do better; fees for broad-based index funds are often 0.10 percent or less.

The overall financial well-being of workers, including their ability to budget and manage debt, has become a priority for more employers. According to a recent survey by the benefits consultants Alight Solutions, 83 percent of companies currently have at least one financial wellness tool in place.

“Employers have increasingly focused on offering financial help with issues beyond retirement,” says Rob Austin, director of research at Alight Solutions. This assistance often includes tools and services in such areas as investing basics, debt management, and financial planning.

To find out what tools and guidance your employer offers, ask your benefits department or go to your 401(k) plan’s website. “It makes sense to take full advantage of all the help you can get,” Benz says.