Smart 401(k) Investing—Managing Your 401(k)
Checking Out Your Plan
You'll want to check up on your 401(k) to make sure that it's performing according to your expectations. That means keeping an eye on your investments' performances and potentially reassessing your asset allocation.
Your 401(k) takes work. Your administrator handles your portfolio's actual transactions and the recordkeeping and reporting, but you decide when and how to reallocate and rebalance your assets. If you check account expenses, regular account summaries, mutual fund quotations and other resources, you have access to information that can help you keep track of—and manage—your 401(k).
You can’t overestimate the importance of a retirement plan, since your long-term financial security is likely to depend on the money you withdraw from your account after you stop working. Because so much depends on your being able to count on this source of income, it’s wise to keep track of how your plan is managed.
You also should receive a copy of your summary plan description (SPD), a document that lays out the rules, schedules and procedures of your 401(k). Your employer should provide a copy of your individual benefit statement at least once every 12 months, though you may have to request it. You might want to review the document with your financial adviser or ask your plan administrator or human resources department about the details. While some account statements are relatively easy to decipher, others may be more difficult to interpret.
If you’re looking for guidance on the issues you should be concerned with, or the questions to raise, you may want to check the Department of Labor’s What You Should Know About Your Retirement Plan.
|An increase of 1 percent in your 401(k) plan fees and charges could reduce your retirement earnings by 28 percent.|
All 401(k) plans carry asset-based fees and expenses that have a direct impact on your investment return and your long-term financial security. An important part of managing your account effectively is knowing what those fees are, what they pay for and how they affect your return.
The difficulty is that it can be hard to calculate what fees are costing you because you don’t pay them directly by writing a check. Rather, they are subtracted before your return is reported. Your account statement does document the amount of money you actually paid for various services and investments expenses, so be sure to check it out. In addition, most fees are explained in your summary plan document (SPD). You can also ask your human resources or personnel department for an explanation.
You can access more information about 401(k) fees and charges from the US Department of Labor’s online publication, A Look at 401(k) Plan Fees for Employees.
Types of Fees
Here’s a look at some of the types of fees you might pay in addition to sales charges that may apply:
Administrative Fees. Your plan administrator takes care of or arranges for the recordkeeping, accounting and legal services required by your 401(k). But those services come with a price tag. The fees that you pay vary, depending on your plan’s provider, the size of the plan and the services it offers participants. Generally, the larger your plan, the lower the rate at which fees are charged—either because they are being collected from more people or because your employer has more negotiating power, or both. In addition, some employers cover some or all of the administrative fees.
Investment Fees. Investment management fees, which you pay on every investment in your portfolio, generally account for the largest portion of the total. These asset-based fees may range from as low as 0.02 percent to 2.5 percent or higher. One complicating factor is that you may pay at different rates within a single 401(k) plan based on the investment choices you make. For example, fees on bond funds tend to be lower than on actively managed stock funds, and fees on index funds, if offered by your plan, are usually lower still. On the other hand, that doesn’t mean you’ll want to avoid all stock funds.
Some investment charges may apply only in specific circumstances. If you know what they are, such as fees for moving money out of a fixed-income investment, you are able to make more informed choices about how to invest and when to make a change. Incurring fees for moving money from one investment fund to another may also make you think twice about constant reallocation.
If your plan offers a brokerage window that permits you to trade securities within your 401(k), remember that you’ll pay a broker’s commission for each trade you execute.
Loan Fees. Unlike investment fees, which all participants pay, some fees are charged on specific services, such as loans. Loan fees can vary from a small percentage of the amount you borrow to a rather substantial percentage of the total value of what you’d be eligible to borrow. It pays to check what costs would apply before you commit yourself.
Your fund prospectus will include a fee table, where you can find more information on the charges you'll have to pay.
Calculating Yield and Return
Although your fees cover the administrative services needed to manage your 401(k), it’s up to you to keep track of how your investments are doing. You can measure your portfolio’s earnings in two ways: through yield, or through return.
Variations on Return
If you’ve contributed different amounts to different investments, you might want to calculate your investments’ percent return instead. And, if you’ve held an investment over a long period of time, you might want to calculate its annual percent return. For instance, a $1,000 bond held over three years with a $145 return has a 14.5 percent return but a 4.62 percent average annual return, which is derived by (1+.145)(1/3)-1= 4.62%.1
When you calculate your return, you might also want to account for annual inflation. Calculating your real return will give you an idea of the buying power your earnings will have in a given year. You can approximate real return by subtracting the inflation rate from your percent return. For instance, an investment with 8 percent return during a year of 3 percent inflation has a real return of only about 5 percent.
You may want to refer to the fund's prospectus, website or annual and semi-annual reports for more information on yield and total return on specific funds.
Reading Account Statements
You can find your earnings on your investments by checking your account statements. Your employer must give you an account statement at least once every quarter. Many plan providers, however, send you statements on a monthly basis. You may also be able to access account information online.
Here’s what an account report might look like:
Roll over the different headings to see what kind of information you'll find.
The frequency with which you receive account reports might depend on how often your account is valued, or how often recordkeepers determine the total value of your account. Valuation also directly affects the flexibility with which you can reallocate your portfolio. If you decide to reallocate your assets, but your plan is valued quarterly, you may have to wait until the close of that period before your investments can be moved.
Other Things to Look For
If you want to determine whether to stick with the investment choices you’ve made or move some or all of your assets into different investments offered by your plan, you’ll have to consider information that mutual fund quotations and account reports don’t provide.
In order to keep track of your investments’ performance, you should compare your results with that of other funds within the same category, such as large-cap value or small-cap growth. Benchmarks, or averages that reflect the movement of a particular financial market or market sector, will give you an idea of how your funds are performing against the standard.
If your fund lags behind its benchmark for an extended period of time—for example, two or three years—you might want to consider replacing it. Just make sure that you’re comparing your fund to the right benchmark. Here are some standard benchmarks for the major market sectors:
1 The standard formula for computing annualized return is AR=(1+return)1/years-1