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Time to Give Your 401(k) a Checkup

Penelope Wang

Consumer Reports has no financial relationship with advertisers on this site.

Consumer Reports has no financial relationship with advertisers on this site.

These days more people save in their 401(k) retirement plans by relying on 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.

A hands-off approach may be fine when you're just starting out. But to stay on track toward a comfortable retirement, it's essential to make periodic adjustments along the way. After all, the bull market has entered its ninth year, which raises concerns about an eventual correction.

“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 financial planner in Louisville, Ky.

Yet most people rarely tweak their accounts. Only 8 percent of 401(k) participants made any trade in their plans in 2017, according to a recent Vanguard study, which is 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. Probably a lot has changed since you began saving in a 401(k). Maybe you got married and received a few raises. Or you may have switched jobs, and you and your spouse now have savings in IRAs or 401(k)s held by former employers.

If that's the case, you'll want to review all your household accounts. “It won’t help to look at your 401(k) in isolation,” says Christine Benz, director of personal finance at Morningstar.com. “Sit down with your spouse and make sure your financial plans and investing strategy are in sync." You can use your 401(k) plan's online calculators to help pull the numbers together. 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 deferral rate by one or two percentage points each year or whenever you receive a raise.

"Your goal should be to eventually max out your contributions," says Maria Bruno, senior retirement strategist at Vanguard. In 2018, the maximum contribution limit for most workers is $18,500, 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.

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 bonds 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 few years, you may 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 generally 0.20 percent or less.

5. Take advantage of new 401(k) services. The overall financial well-being of workers, including their ability to manage budget and manage debt, has become a priority for more employers. Nearly 60 percent of companies currently have at least one financial wellness tool in place, and another 23 percent are likely to add one, according to a recent survey by benefit consultants Alight Solutions.

This assistance often includes tools and services in areas such as investing basics, healthcare education, 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.

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