Re-Think Your 401(K)

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As the economy recovers, you may find some new opportunities to expand your investment horizons — and one such possibility may be your company’s 401(k) matching contribution.

During the depths of the recession, many companies that had offered a 401(k) match reduced or stopped their contribution. But now, more than a third of large employers that suspended their matching contributions plan to restore them over the next few months, according to a recent survey by Watson Wyatt, a consulting firm.

While this development will be welcome news to you if your employer was one of the match-cutters, you can’t necessarily count on getting same match you did before the recession.

Some of the companies surveyed by Watson Wyatt say the size of the new match will vary, based on profits.

Previously, the most common formula used by companies was a match of 50 cents on the dollar, up to the first six percent of pay.

But no matter what size match you are offered, take it.

If you don’t contribute enough to your 401(k) plan to earn the match, you are leaving money on the table — money that could be used to help pay for the retirement lifestyle you’ve envisioned.

If you do need to adjust your contribution level to earn the match, you might also take the opportunity to make changes to your 401(k) portfolio, as needed. Here are a few ideas to consider:

• Avoid overloading on company stock. In a sense, you are already risking a financial asset — your income — when you work for a company, because any company can go through downturns that could affect your livelihood.

Consequently, you don’t want to take on additional risk by overloading your 401(k) portfolio with your company stock.

Furthermore, too much of any one investment in your 401(k) can be risky, which is why you should diversify your holdings among the choices available in your plan.

While diversification, by itself, cannot prevent losses or guarantee profits, it can help reduce the effects of volatility and give you more opportunities for success.

• Rebalance. Your 401(k) holdings should be appropriate for your goals, risk tolerance and time horizon.

Yet, over time, and without any action on your part, your portfolio could become unbalanced. For example, you might have wanted 20 percent of the value of your 401(k) to go into a particular growth-oriented account.

But if this investment increased substantially in price, it may now take up 30 percent of your portfolio, subjecting yourself to more risk than you had intended. At least once a year, review your 401(k) carefully.

• Boost your contributions with each salary increase. Every time your salary goes up, try to increase your 401(k) contributions. Because you typically fund your 401(k) with pre-tax dollars, the more you contribute, the lower your taxable income.

Plus, your earnings can grow tax deferred, so your money potentially can grow faster than it would if placed in an investment on which you paid taxes every year.

By following these suggestions, and by taking advantage of the return of your 401(k) match, you can help maximize the value of your 401(k). And someday, you might be glad you did just that.

Ross Hage is a financial adviser with Edward Jones. For more information, call him at (928) 468-2281.

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