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Ten Years In: Time to get serious about your 401(k)

Hal M. Bundrick

NEW YORK (MainStreet)—You might not think about it until money is tight and you take a good look at your paycheck stub. The taxes! And insurance! The deductions that whittle away at your take-home pay. And what's this? Oh yeah, "Retirement." What a miserable mess that has been. They're taking money out of every paycheck and putting it into that dark hole called a 401(k). You've got five, ten years or so of paying-in under your belt -- so is the freaking thing growing at all? And who has the time to figure these things out? In this just-married, just-had-a-kid, just-getting-by world you're living in, how can you make sense of your 401(k)? Can you patch up your 401(k) and make a true recovery?

Also see: Dipping into Your Retirement Funds Is O.K.--Sometimes

A 2011 report published by Financial Engines, an independent investment advisory firm founded by Nobel Laureate Bill Sharpe, gauged the impact of professional investment help in 401(k) plans, such as target-date funds, managed accounts and online advice -- collectively referred to as "Help" in the report. "Help in Defined Contribution Plans: 2006-2010" analyzed eight large 401(k) plans representing more than 425,000 individual participants. Across all age groups and in a range of market conditions, portfolios of participants using "Help" experienced higher returns with lower risk on average than those not using Help. The annual investment performance gap between the portfolios of those participants using Help and those not using Help was 2.92%, net of fees.

"This investment performance difference can have a meaningful impact on wealth accumulation over time," saod Wei-Yin Hu, director of financial research with Financial Engines. "For example, using the return difference of 2.92%, suppose that two participants — one using Help and one not using Help — both invest $10,000 at age 45. Assuming that both participants receive the median returns identified in the report, the Help Participant could have 70% more wealth at age 65--$71,400-- than the Non-Help Participant--$42,100."

One of those "help" components mentioned in the report is "target-date funds" (TDFs). These investment options are usually indicated by a retirement goal year designation, for example: 2050. The fund has an investment mix that changes the closer you get to your "target date", perhaps reducing stock exposure by a certain percentage each year as you age.

"Target date funds can be a good way to get a diversified portfolio without having to make individual investment allocation decisions, and you get the benefit of automatic decreases in risk as you get closer to retirement," says Hu. "To get the full benefit of these vehicles, you need to make sure the target date fund option in your plan is one with low fees."

These target date funds are designed with the idea that you put your entire account into a single fund, Hu noted, and a common mistake is that many participants continue to see target-date funds as simply additional fund options in their plans, not as an all-in-one fund solution.

Also see: How to Consolidate Your 401(k)s

Roger Wohlner, a fee-only financial planner in Arlington Heights, Ill. says he likes target-date funds too, with a caveat.

"I like target date funds more for younger participants than for say, folks who are 45 or within 15 years of retirement," he says. "For younger participants TDFs can offer instant diversification, especially for investors who might not have any other investments outside of their retirement plan. Even so, TDFs are not 'no brainers', you still need to review these options to understand how your money is being invested. And not all 2050 funds are the same -- the make-up of TDFs with the same target year can vary widely."

Wohlner also says that fine-tuning your 401(k) is not a one-time-only chore.

"Participants need to review their allocation in light of their situation periodically and make changes as appropriate," Wohlner says. "Investors who complained about the carnage to their 401(k) accounts in '08,'09 were likely taking far too much risk anyway and sadly saw the consequences."

Automatic contributions, market performance and a proper investment mix – all of these factors are critical to your 401(k) savings success – but so are fees. In years past, it has been hard to peel away the layers of obfuscation to find out just how many varmints were eating away at your nest egg, but that is finally changing.

Also see: How to Master a 401(k) and Roth IRA at the Same Time

"Starting in 2012 employers were required to provide disclosures about plan fees and expenses to participants," says Wohlner. "The format of these disclosures will vary provider by provider. While some are not as clear as they could be, nonetheless plan participants should review these disclosures carefully."

One drawback even in light of these disclosures remains that the disclosures don't provide any fee benchmarks and this information is a bit tough for participants to find on their own.

"I will say this," Wohlner adds, "if they see mutual funds and investment options with expense ratios of over say 1.25% across the board, this is high. If the expenses are consistently over 1.50% or higher, somebody is making a lot of money off of this plan and it isn't the participants. Larger companies often have better plans in terms of offering low-cost institutional type options -- smaller plans are too often provided by insurance companies with layers and layers of fees that enrich the plan's advisor and the plan provider. Even with smaller plans, a well-run plan with a mix of low-cost active and passive funds can easily be under 1.00% all-in, including fund expenses, advisor's fees, administration, and the rest."

So stop staring at your paystub with that glazed look in your eyes. It's time to get serious about your 401(k).

--Written by Hal M. Bundrick for MainStreet

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