When was the last time you checked on your 401K account to manage your savings? Last week? Last month? Last year?
If you were automatically enrolled into your workplace’s 401K plan — and a growing number of employees are — you might not have even checked or updated your account. Employees who are automatically enrolled in retirement plans are unlikely to go to the same trouble to manage their savings as those who make the effort to enroll on their own, according to research by Dartmouth College management professor Punam Keller. “The reason they are auto-enrolled is because they don’t want to think about it,” Keller wrote in “Mindless Pitfalls: Don’t Leave 401K Automatic Enrollment Plans Alone.”
As important as it is to enroll and start saving in a 401K, you can’t just set and forget your retirement plan — or let your plan administrator do it for you if you’re automatically enrolled. You need to maintain your account. Fortunately, it’s not overly complicated to do so. Here’s what you need to know about how to update your 401K.
Update Your 401K Contribution to Boost Your Savings Rate
Although participation in 401K plans has increased dramatically since they were introduced in the 1980s, many people aren’t contributing enough to their plans, said Jean Young, a senior research analyst in Vanguard’s Center for Retirement Research.
401K plans that automatically enroll employees typically set a default contribution rate of just 3 percent of wages, according to Young. But workers need to be saving 12 percent to 15 percent of their wages to have enough in retirement to cover expenses, Young said.
Many employees also aren’t contributing enough to their 401K to take advantage of matching contributions from their employers. One in four misses out on receiving a full match by not saving enough, leaving an estimated $1,366 of free money on the table, according to research by Financial Engines, which provides investment advice for workplace retirement plans.
Most 401K plans offer participants online access to their accounts, and some even have mobile apps, Young said. This access makes it easy to update your contributions to make sure you’re setting aside enough each paycheck to get your employer’s full matching contribution — if one is offered. If you’re not sure, check with your human resources department. Then, you might still need to contribute even more to save at least 10 percent of wages, ideally 12 percent to 15 percent.
Update Your 401K Portfolio
Just as important as saving enough is saving in the right investments for your retirement timeline. This factor doesn’t mean you should be using your 401K as a day-trading account and constantly tinkering with your portfolio. In fact, Young said do-it-yourselfers would be better served in a single, balanced mutual fund with a mix of stocks and bonds; a target-date fund that automatically shifts to more conservative investments over the years; or a managed account program.
Based on a study of Vanguard 401K plan participants, those who invested in a professionally managed option such as a balanced fund or target-date fund saw their portfolios perform better, on average, than those who picked their own mix of investments. “You can improve your portfolio by using one of these professionally managed options because someone else is doing the rebalancing for you,” Young said.
If you’d rather stick with your own portfolio over a balanced fund or target-date fund, you need to rebalance your portfolio occasionally because the amount you put into various asset classes — such as stocks and bonds — can shift over time as a result of market performance. You might be able to get help with this for free or a small fee. More than half of companies surveyed by the American Benefits Institute and WorldatWork said they offered 401K plan participants access to investment advice.
Keep an Eye on 401K Fees
More than half of workers don’t know they’re paying fees on workplace retirement savings accounts, according to a study by the National Association of Retirement Plan Participants. Plan administration fees and investment fees eat into your returns and reduce the amount of money you’ll have for retirement. For example, if fees and expenses on your account are 1.5 percent, your balance will be 28 percent smaller at retirement than if the fees had been just 0.5 percent, according to the U.S. Department of Labor.
The Labor Department’s fee disclosure rule requires retirement plan administrators to send quarterly statements showing the dollar amount of plan fees and expenses charged and deducted from individual accounts. Pay attention to these statements to see how much fees are eating into your returns.
The investments offered in your 401K might have varying fees, so you might want to consider switching to lower-fee investments — as long as they fit your investment objectives and risk tolerance. Or, you could be racking up sales charges if you’re buying and selling shares frequently, which is another reason to opt for a target fund rather than create your own portfolio. The Labor Department’s A Look at 401K Plan Fees can help you understand fees better.
Update Your 401K Beneficiaries
When you enrolled in a 401K, you likely were given a form to designate a beneficiary for your account — the person who gets your money if you die. You need to update this form if you have any life changes, such as marriage or divorce.
If you are married, federal law says your spouse is automatically the beneficiary of your account, according to 401khelpcenter.com. If you want to name someone other than your spouse as your beneficiary, you must sign a written waiver that you get from your HR department. If you name your children and they are minors at your time of death, most plans won’t transfer the money directly to them. With the help of an attorney, you’ll need to set up a trust, name a trustee and designate the children’s trust as the beneficiary, according to 401khelpcenter. Otherwise, a court will appoint a trustee or guardian to receive the money.