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How to Whip Your 401(k) Into Shape

Kate Stalter

With the sharp decline in the number of traditional pensions, Americans are increasingly required to save for their own retirements through employer-sponsored 401(k) plans. At the end of March, 401(k) plans held approximately $4.3 trillion in assets, according to the Investment Company Institute. That's up from $2.2 trillion 10 years ago.

As of 2013, the U.S. Department of Labor tallied 638,390 defined contribution retirement plans in the U.S., with more than 88 million people invested. The bulk of these plans are 401(k)s, although many workers participate in 403(b) plans offered by not-for-profit companies and 457(b) plans offered by government employers.

Workers who contribute to employer-offered plans enjoy several benefits, such as automated retirement savings, tax advantages and often, an employer match.

But even among employees who participate, many are not unlocking their plans' full potential. James Brewer, principal at Envision 401k Advisors in Chicago, recommends a basic three-pronged approach to a retirement plan. "I call it the retirement SAT," he says. "In this case, it's savings, allocation and time. These are the three variables in your control that properly manipulated, help you to get the accumulated balance you need in the future."

Brewer and other 401(k) advisors recommend plan participants take control of their own savings program to optimize their results. That means not only understanding the investments in your portfolio, but contributing regularly and evaluating your investment strategy, for example.

Read: [Should a Single Number Guide Your Investment Decisions?]

At the same time, it helps to get your overall financial situation organized, says Chad Parks, CEO of The Online 401(k), a San Francisco firm that helps small businesses and employees manage retirement plans. "First and foremost, know what your budget is. What's coming in and where is it going? We have direct deposit, online bill pay, but then we go out and charge things and don't feel like we are making any progress. A lot of people don't pay attention to where their money is going," he says.

That perspective, he adds, gives 401(k) participants a better understanding of how much they can and should be saving in their plans.

Here are some professionals' recommendations for getting your retirement accounts into top shape.

1. Start saving as early as possible. If your employer offers a plan, you're only cheating yourself if you fail to participate, says George Huss, host of the "401k Owner's Manual" podcast. "Start as soon as you can and contribute as much as you can," he says, emphasizing that we determine our own financial outcome for our non-working years. The earlier you start saving, the more you let time and the magic of compounding work in your favor.

2. Know how much you should be saving. In 2014, the maximum allowable 401(k) contribution amount is $17,500. People age 50 and older may make an additional catch-up contribution of $5,500. Several online calculators recommend that employees salt away 10 percent of their salary in a 401(k). However, Brewer says many investors don't do the math to understand how much they should be saving. "At $17,500, a person making $175,000 a year can put away 10 percent," he says. Brewer recommends not including an employer match in your savings calculations and considering it as extra money instead.

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3. Don't forego the employer match. Many employers match a worker's 401(k) contributions up to a certain percentage of his or her salary. Workers who don't participate in such a plan are leaving free money on the table. "Say your employer does a 50-cent match on the dollar, up to 6 percent. If you can't contribute the full 10 percent, at least get to 6 percent, so you get that incremental amount from your employer," says Neil Smith, executive vice president of Ascensus, an independent retirement and college savings plan provider.

4. Familiarize yourself with your investments. The 401(k) defined-contribution structure requires that participants have at least some knowledge of investment allocation, at least if they want to make the most of their plan. "Given that you are responsible for your retirement plan, it is critically important to educate yourself. Even if you know nothing about investments, know that you must begin," Huss says. "Anyone who refuses to do so and casually believes their company or their 401(k) provider will take care of them is putting their future in grave peril."

5. Get advice. If you have an investment advisor or financial planner, ask him or her to help you allocate your assets in a 401(k). If not, you may still be able to get professional input into your allocations. Many plans offer online tools to help allocate, or even the ability to call a live person and ask specific questions. In addition, Parks says plan participants can pay a third party a flat fee to analyze their 401(k) and suggest an investment strategy to match goals and risk tolerance.

6. Rebalance on a regular basis. Many plans help participants automatically rebalance to keep the allocations in line with goals. "Set your auto-rebalance to six months or one year. You don't want to rebalance every day," Smith says. For example, if your target allocation is 50 percent stocks and 50 percent bonds but the stock market has a strong rally, your allocation could become 65 percent stocks and 35 percent bonds. Automatic rebalancing will set that back into alignment. "It's a very disciplined way to take those emotional decisions out of play so that you're executing based on better investment principles," Smith says.

7. Be careful with 401(k) loans. Many plans allow participants to take out a loan from their 401(k) and then pay themselves back. However, Brewer cautions about the opportunity cost of borrowing: Money taken from the plan is no longer invested and allowed to grow. Another problem, Parks says, is that you are repaying the loan with after-tax dollars, which means you also lose a tax advantage. If you do take a loan, Parks recommends accelerating repayment as much as possible.

Read: [7 Ways to Take Advantage of Your 401(k)]

8. Automate contribution increases. If you can only contribute a small percentage of your salary today but expect to get raises over time, consider automating contribution increases. "That way you don't have to monitor the increases on an ongoing basis or remember to do it every year," Smith says. "Your service provider can do that." In his experience, most people don't save enough in their employer retirement plans, so increasing the contribution rate by 1 or 2 percent a year is a relatively painless way to grow account value.

9. Watch the fees. When choosing the available mutual funds, most do-it-yourself investors gravitate toward performance and overlook expenses. Not all funds are created equal, and some have much higher costs than others. In addition, look at the fees the plan manager charges. Parks recommends studying the fee disclosures, which are available online or from your employer's human resources department. "If you are paying more than a 1 percent fee overall, then you can probably get a better deal somewhere else," he says.

10. Consolidate 401(k) plans from previous jobs. It's not uncommon for people to leave a job and forget to move their 401(k) from their prior employer's plan. In fact, many Americans have several "orphaned" 401(k) accounts sitting with various managers. These can be rolled into your current employer's plan or into an individual retirement account. The important thing is to get these investments aligned with your current investment strategy.

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