One of the best ways to build your nest egg is to participate in an employer-sponsored retirement plan. Many companies offer 401(k)s to their employees, providing you with the chance to put away a significant amount of money each year and enjoy a tax benefit to boot. But not all 401(k) plans are the same. You need to know the basics of what's being offered — remember, this is YOUR retirement at stake.
1. What Are Your 401(k) Fees?
You think your 401(k) plan is free? It's not! The average Amercian thinks they pay nothing for their 401(k) plan.
The fist step is to check the fees. Even if the fund options are awesome and perfectly allocated, if the fees are high, it's you and only you who will lose. (The fund managers will earn the fees whether they do well at managing your retirement account or not.)
To illustrate: Mary has $25,000 in her 401(k). Let's say her company does NOT match, and Mary stops contributing once she hits $25,000. The fund averages a 7% return, and Mary plans to retire in 35 years. If her plan's annual fees are 0.5%, her account balance will grow to $227,000 by the time she retires. But if her fund's fees are 1.5%, she's down to only $163,000. If it's 2.5%, she's down to only $117,000.
So can you see why we encourage you to at least take a peek? What if your 401(k) plan has 3% fees?!
How To Find Out (for free)
- Get the Blooom app. It's free to test out and literally takes five minutes to get started.
- If you already have Personal Capital, use their Fee Analyzer. If you DON'T have Personal Capital, sign up for this free service.
- Look into America's Best 401(k) to replace your existing 401(k) plan. They take fee analysis to a whole new level. Not only does ABK break down fees, but they will send you a free report that you can give to your HR department to educate them as to why the fund being offered is bad for employees (if it is) and what options are better.
2. Where Is Your Money Is Being Invested?
Trust me, you don't need to become a financial expert to figure this out. Let's just answer some really simple questions about YOUR money:
- Is your money being invested in the stock market?
- Are the stocks primarily in the U.S., or are they international?
- Is the fund invested in the bond market? Or annuities? Or real estate? Or your own company's stock?
It's common for companies to offer target date funds, which, basically, are managed according to an asset allocation appropriate for your age. As you move from your 20s to your 30s, to your 40s, target date funds will adjust their portfolios. Just because your 401(k) might be invested in a target date fund, however, doesn't mean you shouldn't at least be aware of the current allocation.
How To Find Out (for free)
- Locate the ticker symbol on your last quarterly 401(k) report. It is usually four characters all in uppercase. If not your fund might be privately traded.
- Go to Google Finance and enter the ticker symbol.
- From here, browse around and look for things like “Top Ten Holdings” and “Asset Allocation,” as well as a brief description of the fund's goals.
My old company offered 401(k) plans through Fidelity. At the time, I had chosen to invest in a target date fund called Fidelity Freedom 2050 Fund (FFFHX). Within a few seconds, I found this using Google Finance:
So now I know that my 401(k) plan is about 88% invested in stocks — good to know!
I learned that over 70% of the top holdings are other Fidelity funds… interesting. But when I click on the first one, Fidelity Series Equity-Income, I can see that the top 10 holdings of THAT fund are:
So there you go. These are two really easy steps anyone can take to inform themselves about their own money.
After all, when you get a paycheck every two weeks, it doesn't just go into a black hole. You KNOW where the money goes — in the bank, toward food, toward housing, etc. There is no reason that the 5%, 10%, etc., that you are investing toward retirement should go into a black hole, either.