Since the advent of defined contribution plans 30 years ago, the responsibility of saving for retirement has fallen largely on employees' shoulders. Many employers are freezing or terminating costly pension plans in favor of 401ks and similar plans, according to a Prudential Financial Inc. survey.
If you're looking to catch up or get ahead on saving for retirement, there are steps you can take to do that. Click through to see 10 tips that can help you boost contributions to your 401k.
1. Start Saving Early
When it comes to getting started on saving, younger savers tend to get overwhelmed by the choices, rather than just starting to save, said Chris Carosa, a financial journalist and author.
"This so-called 'paradox of choice' occurs when too many choices cause people to delay decisions," he said. "In reality, it’s better to just start saving with no undue emphasis on investing. Time heals all poor investment decisions, so the earlier you start saving, the less critical investment performance will become."
One option, especially for younger 401k participants who have few or no outside investments, is a target date fund. Some target date funds are good, others are not. However, this can be a good first step toward an instantly diversified portfolio for younger savers. Over time, as they gain investing experience and confidence, they might consider other choices in the plan.
2. Commit a Percentage of Your Income
Saving a percentage of your income can allow you to start out small, without feeling the pinch when you get a raise, said financial planner Sterling Raskie. Anything to make saving automatic and painless is generally a good idea.
"In other words, if a person saves 10 percent of their $50,000 salary, they're saving $5,000 annually," he said. "As they get raises/promotions to $55,000 or $60,000, their savings automatically increase, versus having to remember to raise by a fixed dollar amount — which most folks won't remember to do."
3. Pretend Bonuses Never Happened
If you come upon a bonus at work or other windfall, resist the temptation to spend it. Instead, put that money toward your 401k. Since your monthly budget likely wasn't already accounting for a sudden boost in income, you won't miss the extra dollars from your checking account.
4. Take Advantage of Auto-Escalation
If your employer’s plan offers auto-escalation, that's one relatively painless way to increase your contributions. "Many 401k plans allow you to set up an automatic increase so that the percentage you are saving increases at a certain interval — like every six months or 12 months," said financial planner Katie Brewer. "For example, if you started with a 3 percent contribution rate and set up an automatic contribution increase of 2 percent every six months, you would be up to 11 percent contribution in two years — and you would barely even notice it."
5. Reduce the Cost of Your 401k
The average worker might pay an estimated $138,000 in 401k fees in a lifetime, according to nonpartisan policy institute Center for American Progress. Although you might not be able to control what plan your employer offers, try to reduce your investment costs as much as you can.
"Funds with low expense ratios tend to outperform funds with higher expense ratios," said Mike Piper, CPA and personal finance author. "So it often makes sense to pick the lowest-cost fund in each of the categories you want to use in your 401k — as opposed to, for instance, picking based on past performance.”
6. Monitor Your Account
While it's unnecessary to check your retirement account on the daily, you shouldn't completely ignore it. "There are no 'set it and forget it' investment options," said financial planner Eric McClain. "Monitor what's going on in your account. Occasionally, you'll see folks who never opted into their 401k, or went with the default investment option and never changed it or are failing to save enough to receive the match. Avoid these mistakes.”
Review your account each quarter when you get your statement, and determine whether you need to make any adjustments. Also, don’t ignore any communications about the plan from your employer or the company managing the plan platform.
7. Keep Your Portfolio Balanced
Investing in your 401k plan is a marathon rather than a sprint. Maintain and increase your salary deferrals in good markets and bad. Rebalance your portfolio periodically. Many plans have an auto-rebalance feature that allows participants to set their accounts to rebalance back to their desired allocation at regular intervals. Ideally, you would do this every six months, no more frequently than quarterly and no less than annually.
8. Get Your Full 401k Company Match
Conventional wisdom says that 401k participants should contribute at least enough to receive the full employee match, if one is offered by your plan. A better approach, however, is to calculate what you will need to accumulate for retirement, then work backward from there to determine your contribution.
If you can’t afford that amount right now, do what you can, but strive to increase your contributions. The maximum contribution limits for 2016 are $18,000, and $24,000 for those who will be 50 or older.
9. Don't Shy Away From Risk
Investments of all kinds come with some degree of risk. On the one hand, in a bad market, stocks, bonds, mutual funds and exchange-traded funds can lose their value. However, when it comes to conservative, insured investments — like certificates of deposit issued by a bank or credit union — there's an inflation risk. This means that they might not earn enough to keep up with the cost of living, according to the Financial Industry Regulatory Authority.
Nobody likes to lose money, but your account can’t grow if you don’t assume some risk. As with any type of investment account, be sure that you are investing according to your financial plan, your age and risk tolerance.
10. Don’t Cash Out When Switching Jobs
One of the key habits of a 401k millionaire is not withdrawing your money from your 401k account when switching jobs, according to Fidelity. Taking a distribution can cause tax liability and early withdrawal penalties.
Meanwhile, any money you take out immediately loses its opportunity for growth. If you have a small amount saved, however, you can transfer your 401k to a plan offered by your new employer, or into an IRA.