6 strategies for 401(k) success

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Simple Strategy to Help You with 401K Investment Stress

For the majority of American workers, the 401(k) plan has become their single largest source of retirement savings.

If you participate in a 401(k) plan, the good news is that you have more control over your retirement money. The bad news is you have more control over your retirement money.

For people who do not have the time or the financial knowledge, properly managing their 401(k) can be a daunting task. Moreover, if you do not manage it properly, the 401(k) can become, at best, a savings account and, at worst, a high-risk gamble with your retirement money.

To avoid the latter, use these tips to better manage your 401(k). Here, you'll find some ways that successful savers manage their own accounts to help you make the most of your own plan.

1. Know your 401(k) plan options. Every 401(k) plan has unique characteristics. To maximize your plan, you need to know all of your options.

Your plan documents, distributed by your benefits department, will outline options such as hardship or in-service withdrawals, loans, vesting schedules, limitations to moving money and so on. Read this document carefully or have a financial advisor review it with you.

If your plan does not meet your investment needs, and it allows for in-service withdrawals, you may be able to move some of the money to other vehicles, such as an individual retirement account, where you may have significantly more investment options to consider.

2. Allocate appropriately. Asset allocation is the principle of deciding how to spread your investments across various asset classes, such as stocks, bonds and cash. There are subcategories within each class, such as small-, medium- and large-cap stocks. The idea is to diversify your holdings to potentially increase returns while diminishing risk.

A variety of factors determine the appropriate allocation for each individual: when you need the money (which is not automatically dictated by your retirement age); how much money to have now and expect to need later; what kind of risks you are willing to take; and what other assets you have invested outside your 401(k).

Perhaps the most important factor is your time horizon – the more time you have, the more aggressive you can be.

Second, determine the time horizon for retirement. Is it around the corner? Or maybe more than 10 years away? The longer you have until you need the money, the more heavily weighted you should probably be in stocks. You'll have more time to recover any losses incurred during a market downturn.

3. Limit exposure to company stock. Company stock can be a double-edged sword. Perhaps your bonuses are gifted in stock, or as a loyal employee who understands the business, you want to participate in the growth of the company by being a shareholder. Either way, it can be risky to have too much of your portfolio in one stock, as it creates a nondiversified portfolio.

The question to ask yourself is this: Do you really want the fortunes of one company to control your destiny?

This is not to say that the company you work for is going to become the next Enron. That still doesn't mean the question of what would happen if the stock suddenly tumbled 10 percent to 20 percent isn't worth asking.

By playing out a hypothetical scenario with your financial advisor, you can be more informed of possible misallocations.

4. Reallocate tactically. While it is not advisable to move your money around daily (market timing in general has not proven to be an effective strategy over the long haul), it is advisable to look at what your investments are doing from time to time.

If one segment of the market has outperformed other segments significantly, your portfolio is likely to be significantly out of balance.

Here's a hypothetical example: You ideally want to have 70 percent of your money in stocks. But during the past few months, the market has done well overall, and it has grown to represent 80 percent of your portfolio.

If you did nothing and the market went south, you'd lose those gains that you made, and possibly even more. To make sure you again have 70 percent of your portfolio in stocks (and help to lock in your gains), you need to do some rebalancing.

5. Consider the tax consequences of your actions. Many of the things we do in our financial lives have tax consequences. Avoid them where possible!

If you leave your current employer and decide not to leave the assets in the current 401(k) plan, be sure to roll it over directly to an IRA or to another employer's plan.

If you instead take a full distribution (cashing out the assets), you'll pay federal and state taxes on the entire amount. And if you're not yet age 55 (slightly different in the 401(k) world than the typical age 59½ requirements), you may also pay an additional 10 percent penalty. If you are over age 70½, you must follow the IRS rules for required minimum distributions (unless you are still actively working).

Ideally, you'll take only what you need, when you need it. Or said another way, don't let your 401(k) become a 201(k).

6. At retirement, balance your needs for income and growth. Have you had a conversation with your financial advisor about the possibility of a stock market dip or other financial issues? It used to be that you could retire and shift all your assets to fixed-income investments, but in today's low interest-rate environment, "risk-free" investments may also mean "growth-free." Put another way, they may not even keep pace with inflation. As you stop working in retirement, it's time for your assets to work harder than ever. Risk can be a healthy and important part of a carefully designed portfolio and income plan.

While there is no step-by-step process for guaranteed financial success, following these steps will put you in a better position to make the most out of your 401(k). And as always, be sure to talk to your financial advisor for questions on your specific situation.

Securities offered through SII Investments, Inc. (SII), Member FINRA, SIPC. Advisory Services offered through Scarborough Capital Management (SCM), a Registered Investment Advisor. SII & SCM are separate companies. Neither SII nor SCM provide tax or legal advice.

Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice.

This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.

Copyright 2015 U.S. News & World Report

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