You kept hearing that your employer's 401(k) plan is one of the best places to save for retirement. So you enrolled, and you've been contributing. But, for some reason, things aren't going the way you hoped. What could be wrong?
There are several reasons your 401(k) account might not be all it's cracked up to be. Fortunately there are ways to address each of them.
1. You've ignored your investing options.
Don't ignore your 401(k) plan account! Lots of 401(k) investors end up in the plan's default investment option -- typically a target-date or money market fund -- because they haven't made an investment election. If this sounds like you, then look at your plan's options and select a portfolio that is appropriate for you. Then periodically reassess the way your account is invested so that you can adjust as needed -- if your personal situation changes or your plan changes funds, for example.
Additionally, don't settle for merely contributing the same amount forever. Contribute as much money as you're able, and continue to increase your contribution percentage annually and with raises.
2. You don't really understand how you should be investing.
Simply selecting a few funds that performed well last quarter is not a good strategy for retirement investing. You need to examine things like your current financial situation, your tolerance for risk, how long you have to invest, and how other accounts that you own are invested, plus how your investments interact with those held by your spouse or partner. Armed with that information, you can choose an appropriate allocation -- the right mix of investments for your account. It's good to diversify by spreading your money across different investment categories, known as asset classes, to help reduce your portfolio risk. Try an online asset allocation calculator for some guidance. Then, target allocation in hand, select funds from your 401(k) plan's lineup to represent each asset class in your target allocation.
3. You haven't taken advantage of the plan's features.
Your 401(k) plan may have one or more really useful features, including:
--Automatic rebalancing. Over time, some funds perform better and grow more quickly than others, so the percentage of the investments in your account shifts. This can make your portfolio more or less aggressive than you intended. Rebalancing corrects that, and having your account set to automatically rebalance on a regular basis keeps you from forgetting to do it yourself.
--Automatic contribution increases. Setting your contribution rate to increase automatically by the percentage and at the frequency you choose is an easy way to ensure you continue to increase your 401(k) contributions and grow your retirement nest egg.
--Investment advice. Your plan may provide access to financial advisers who specialize in 401(k) investing and can help you decide what investments and contribution level will best help you reach your retirement goals.
--Planning resources. These could include articles, calculators, and more.
Maximizing your 401(k) does take work. You don't have to do all of the work yourself -- from taking advantage of plan features to working with an adviser, help is out there -- but if you want to get the most out of your retirement savings, you have to make sure the work gets done.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
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