Today, many workers are failing to take full advantage of their 401(k)
s. One can find numerous legitimate reasons for this. For all the
reasons in the world, in failing to take advantage of your 401(k), (or
other company sponsored retirement plan) you guarantee yourself the
failure to taking advantage of the most powerful force in the universe
according to Einstein, compounding. Compounding
This is a
powerful force that relies on the nonrenewable resource of time. As
time decays and your retirement draws near, you cannot go back and make
it up. As time passes you will be forced to make more difficult
decisions and increase your risk the farther you are from your nest egg
goal. There are usually no black and white decisions in investing, just
shades of grey. But failing to take advantage of your 401(k) should be
a clear decision.
I am often asked how much should I put in.
At a minimum I urge you to max out the match. Use that phrase when
talking to your companys retirement specialist or contact human
resources for details of your companys plan. Typically it is based on
your base pay and a mathematical formula which differs from company to
company. Maxing out the match is identical to giving yourself a raise.
It may only be a few percent points a year, but who cares, when has
anyone walked into a casino turning town free upfront house money. And
over the long haul of investing, those few percentage points snowballs
into a considerable amount.
What Choices You Have Makes a Difference
After
that consider how much else you can put away. Nearly everything
accessible in your 401(k) is accessible in an outside account. However
if you are dollar cost averaging with your company stock, it may make
more sense to purchase it within your 401(k) to keep trading cost low.
What
to do with the excess money you are able to invest varies case by case.
You need to determine the quality of funds and investment options
within you 401(k). For example, a client worked for a prominent telecom
company. They had a reputable financial company managing their 401(k).
However, perhaps the telecom company was attempting to keep maintenance
fees to a minimum; they selected a plan with a limited amount of fund
choices. Of those funds, I reviewed, I felt over 80% of them were
underperformers with excess risks. So we maxed the match by allocating
his contribution into the few good funds he had to select from. The
remainder of investment his dollars was blended within a proper mix of
his and his wifes Roth IRA, 529 plans for his children, and an annuity.
Once again, that proper blend varies from individuals so consult a
qualified advisor if you have question regarding your situation. What
should I get?
If you are a value investor, and if there are
quality value funds within your plan, I would consider taking advantage
of them.
