Give your 401 (k) a checkup

The secret to savings success in 401(k) retirement plans has long been cruise control. You’re automatically enrolled when you join the company, your money is deposited regularly in an investment portfolio, typically a target-date retirement fund, and you leave well enough alone.

It's been easy to stick with this hands-off approach through most of the past decade, because the stock market has delivered strong returns.

But your 2018 year-end statement may show something quite different—a negative return. Last year stocks dropped sharply in the fourth quarter, giving up 13.5 percent, though the market partly rebounded in January.

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Of course, market downturns are part of a normal market cycle. Still, it's a reminder that staying on track to a comfortable retirement means making periodic tweaks to your portfolio along the way.

“If you haven’t reviewed your 401(k) plan lately, it may no longer reflect the level of risk you want to take or your current financial situation,” says Andrew Sloan, a certified financial planner in Louisville, Ky.

Yet most people rarely tweak their accounts. Only 12 percent of 401(k) participants made any trade in their plans in 2017, according to a recent Vanguard study, which was the same percentage that did so the previous year.

Key Course Corrections

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:

1. Look at the big picture. Don't overreact to the recent investment losses. Granted, the market drop hit even well-diversified portfolios, such as target-date retirement funds. The average 2020 target-date fund, geared for those retiring next year, gave up 4.5 percent in 2018, according to data from Morningstar.com, while the average 2050 fund, designed for 30-somethings, dropped 8.52 percent.

Despite that, your overall balance may have grown thanks to those steady automatic contributions. And over the long-term, the average target-date fund has delivered solid gains. The typical 2020 fund, for example, returned an average annualized 4.5 percent over the past three 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, or 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 your portfolios. If you have old 401(k)s in former employer plans, consider consolidating them.

2. Rev up your contributions. The typical 401(k) saver puts away about 6 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.

So boost your contributions as much as you can. At the very 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. Then gradually raise your contribution rate by 1 or 2 percentage points each year or whenever you receive a raise.

"Your goal should be to eventually max out your contributions," says Maria Bruno, head of U.S. wealth planning research at Vanguard. In 2019, the maximum 401(k) contribution limit for most workers is $19,000, but those 50 and older can put away an additional $6,000 in catch-up contributions.

It may cost a bit less than you think to save more. If you earn $60,000 and kick in 10 percent of 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.)

3. Adjust your asset mix.  Given the long stock market rally, your portfolio may be overloaded in equities if you haven't been rebalancing, says Bruno. Someone who started out with a 60-40 stock-and-bond mix may have 70 percent or more in stocks by now, despite the recent market dip.

Holding that much in equities raises the risk that you’ll experience much more severe losses than you can handle when the next bear market arrives. And for anyone nearing retirement, that kind of setback could derail your plans.

It's easy to adjust your allocation. Just shift enough money from your stock funds to your bond funds to restore your original 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.  

4. Lower your fees. 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, says Benz.

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.

5. Take advantage of new 401(k) services. 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 benefit consultants Alight Solutions, 67 percent of companies currently have at least one financial wellness tool in place, and 59 percent are likely to add one.

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

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," says Benz.