Sunday, December 29, 2013

New Year for 401(k) Plans

We've gotten a steady stream of new applications in TAG 401(k), but since many participants have capped out their 2013 contributions, and everyone else will be ending contributions because the calendar year is just about over.

Therefore, we offer some general and Plan specific reminders and tip as we bound into 2014:

This has been a good year for equity investors. Many major stock market benchmarks are at or near record highs. These investment gains have pushed balances in the accounts of many 401(k) participants higher as well. While this is good news, 2014 is a new year. Here are five tips to get (or keep) your 401(k) in shape for 2014 ...

* Increase your contributions. The biggest determinant in the amount accumulated at retirement is the amount saved. Assuming you aren’t already maxing out your salary deferrals. ... Increase the percentage of your salary deferral each year. ... Deferrals are the most painless way to save and invest for retirement.

* Review your investment options. This is the time of year when many companies change some or all of the investment options in their plans. If you haven’t looked at what is offered in your 401(k) plan lately, this is a good time. These changes might warrant some adjustments in your personal investment strategy.

* Rebalance. If you have an asset allocation strategy for your 401(k), you are likely overweight in the equity portion of your account. This is a good time to rebalance your account back to your intended allocations. Letting your equity allocation go unchecked in hopes of capturing any additional gains is tempting, but it also exposes you to more risk than you might be comfortable with.

* Manage your 401(k) as part of your overall portfolio. One of the biggest mistakes 401(k) investors can make is to ignore their investments outside of their 401(k) when allocating their account. I am a firm advocate of an investment strategy based on a financial plan. As a key element in your retirement savings strategy, your 401(k) account should be managed as part of an overall portfolio, which may include your spouse’s 401(k), Individual Retirement Accounts old 401(k) accounts, taxable investments and more. ...

You should note that the contribution caps are unchanged for 2014. (What we get in a low-inflation environment.) This year the total amount contributed for participants 49 years of age and young remain $17,500. If you turn fifty in 2014, you can defer an additional $5,500.

Here and there I get asked by participants what they should invest in. After explaining I'm not a licensed financial advisor, I tell them the following:

What's important is to have an investment strategy that's right for your tolerance for downdrafts in the market and your age. If you're young, you should probably be weighted toward stocks because you have a looong investment horizon.

But if you freak when markets go south, you should ... maybe? ... invest more conservatively. (You know your comfort level and tolerance for risk, so make your own decisions.)

For most participants, their best option is to choose one or more of the Vanguard Target Retirement Funds because they are inexpensive, simple and you'll have wide diversification in both stocks and bonds.

(If you want to get more complex, here's a list of portfolios by some top investment experts. You can build rough facsimiles of most with a selection of the 20+ funds that the TAG 401(k) Plan offers. I tell members to stick to index funds because they're way cheaper and offer better results over time.)

You need to have a simple investment strategy you understand and can be executed without angst or trepidation. Efficient, smart investing doesn't have to be complex. And as you learn more about stocks and bonds, you can change you mix of funds.

But the most important things you can do is to get started and then stick with your program.

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