401(k) Tips for the New Year
Give your retirement plan a tuneup to keep it running smoothly.
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Full Transcript below:
Speaker 1 (00:07):
Welcome back to 30 Minute Money, the podcast that delivers action oriented smart money ideas and bite-sized pieces. My name is Scott Fitzgerald at Roc Vox Recording and Production Studios. Joining me in studio today, Stephen Wershing from Focused Wealth Advisors. I called you Stephen. That means you're in trouble.
Speaker 2 (00:22):
Oh, okay, mom. Sorry, whatever I did, I didn't mean to. I won't do it again.
Speaker 1 (00:28):
We're going to talk about 4 0 1 Ks today. We
Speaker 2 (00:30):
Are, we're going to talk about tuning up your 401k and making sure that it's in tip top shape for the new
Speaker 1 (00:34):
Year. It's running smooth.
Speaker 2 (00:36):
It's running smooth. All right. Clicking on all cylinders. Firing all cylinders. Yeah. A lot of people handle their 401k like it's say, set it and forget it. And there are some things that you should do in your 401k if it's going to give you the biggest benefit. And so that's what we're going to talk about today is how to give it a little tuneup, make sure that it's still performing for you.
Speaker 1 (00:58):
Yeah, I always wanted to get the idea of how often are you supposed to check in and see what's going on and how things are generating or not generating or anything like that.
Speaker 2 (01:11):
Yeah, if you do that once a year, it's probably fine.
Speaker 1 (01:14):
Really? Yeah.
Speaker 2 (01:15):
Okay. It doesn't have to be a lot. It doesn't have to be a lot, but you should shake in on it once in a while, and if you do it annually, that's probably fine. And so the first thing that you're going to want to do is to take a look at how the investments in that 401k are allocated across the different investment options that you've got money in.
Speaker 1 (01:32):
Now, is that when you talk about is it aggressive, is it conservative, that kind of thing?
Speaker 2 (01:38):
Yeah, on a macro level, on the really high level, it's stocks versus bonds versus cash. What's the allocation there? And the younger you are, the more stocks you can have and the closer you get to retirement, bonds should become a larger and larger portion of that portfolio. But here's what happens. Allocation works to reduce risk in a portfolio and over the long-term, actually, it can also lead to higher long-term returns, but it only works when you rebalance. That only works if you rebalance. If you just say, I'm going to put 60% in stock and 40% in bond, and we're just going to let it run. Well over the long run, stocks will probably outperform bonds. And so if they are systematically earning more and more than bonds are, then it will go from 60 to 62 to 65 to 66, and it will gradually occupy more and more of the portfolio and that just increases risk.
Speaker 1 (02:41):
Oh, I see. So you want to make, so if it's been performing well and now it's up to 70%, you want to go back and say, no, no, no, we want to keep that at 60% or whatever you have.
Speaker 2 (02:51):
Exactly. So you rebalance the portfolio to whatever allocation is appropriate to you. And it's a way of systematically, like we can never call when the market are going to be or the market lows, but if you rebalance it systematically, it's a discipline that gets you to systematically sell things when they are relatively higher and buy things when they are relatively lower. So you're never going to hit the highs and lows, but if you do it on a systematic basis, then you will be taking advantage of those ups and downs without having to worry about the timing of it. So is it the right allocation for you, and when was the last time you rebalance it? Is it still that allocation? The next thing that you may want to take a look at is of the choices that you've made, are any of them underperforming? Many 4 0 1 Ks have many different options. They can be dozens of options in a 401k, which I don't consider necessarily to be a good thing.
(03:50):
It's important to have a number of choices, and it's important for those choices to be diverse in terms of what kind of investments they put money into and different characteristics. But just going from 20 investments to a hundred, it just confuses people. It just makes it even harder to do that. So however, based on if you have a 401k that's got lots and lots of options, so let's say you want a certain portion to be in stock, well, you might have 12 or 15 or 20 different stock funds. Have you taken a look at that fund and how is it done compared to its peers? Because if it's done poorly, then you can swap it out for a different one that's still in your 401k and systematically get out of things that underperform and get into things that keep up with their peers.
Speaker 1 (04:35):
So when you're talking about checking in once a year as being good, you are referring to the fact that your 401k is already being watched over by someone like yourself?
Speaker 2 (04:48):
No. If you're working with an advisor, then that advisor, if they're providing comprehensive advice, which we do, and I think all advisors really should do, they'll be looking at it as well, you might have set up a data feed so that the 401k shows up in the planning system, or they might just ask you for statements a couple times a year and your advisor should be doing that. But if you don't work with an advisor, then you should be doing it because it needs to be done. If you're going to make the most out of it.
Speaker 1 (05:19):
How quickly do things start to underperform? Is it something that could suddenly, I mean, obviously if the stock market crashed or something, it would be a different story, but if you're not looking at it, and that's just my concern is
Speaker 2 (05:34):
Yeah, everything things fluctuate on a quick basis, but under performance is really more of a long-term thing. So I wouldn't worry about, oh, it underperformed this month because things are going to go up and down every month. I see underperformance is really over the past three to five years trending. Yeah, this fund has performed the average, underperformed the average stock fund by 20%. Well, maybe we want to make a different choice. So it's not a short-term thing. It's going to be based on longer term statistic. If you do it on a short term, if you do that quick switching back and forth, you will probably underperform as a portfolio. So you want to be basing it on longer term statistics.
(06:19):
Now also, I will say that while having 150 options in your 401k is not necessarily a good thing, it's also not necessarily a good thing if your 4 0 1 KK has like three investments in it. So if you are not happy with the investments in the portfolio or if you don't think that you have enough, one thing that you can look for is something called in-service distributions. And what that means is that even while typically you can't get money out of a retirement plan until you leave service, until you separate from the company. But if your plan provides for in-service distributions, then you can roll money out of that 401k even while you're still working there and you can put it into an IRA where you have a lot more choices and a lot more control over what you invest in. So if you're not happy with the performance of a lot of things in the 401k, take a look and see if you have in-service distributions as part of your plan. If you do, you may be able to put it someplace where you have more choices that you can make.
Speaker 1 (07:20):
Is that something that you can add or is it you find that when you first create the 401k,
Speaker 2 (07:27):
It's not up to you, it's up to the plan. It has to be in the plan design. But if you ask your HR department for a summary plan description, it'll be in there or you can ask your advisor to look into it. They can read a summary plan description. We do it all the time. So that's something you can take a look at. The next thing that you can take a look at doing your 401k tuneup is how much are you contributing? And so if you started putting in 5% a couple of years ago, if you've gotten a couple of raises since then, have your contributions kept up with that? Ideally, when you get a raise, some of that will go to fund a better lifestyle, and some of that will go to increase the amount that you're saving. So sometimes you can do that automatically within a plan, but whether or not it's something good to look at, so take a look and as your income has gone up, have your deferral percentages gone up, your contributions as a percent of your salary, have they gone up as well?
(08:24):
Ideally, that's what would be happening. It makes it a lot easier to hit your retirement goals if you're doing that. And where you want that to be as a minimum is that if your company provides you with matching contributions, meaning if you participate, they will put in money with you, you want to make sure you're maximizing those out. So if they will contribute dollar for dollar up to 3%, you want to make sure you're putting in at least 3%. If you're not, you're leaving money on the table. So that's something to check as well. And then finally, now more and more plans have an option to put money in after tax as opposed to pre-tax. So you have traditional 4 0 1 Ks and now you have Roth versions of 4 0 1 Ks. And one of the things we've talked about before is the secret to developing a low tax retirement is having a nice balance of your savings across the three tax buckets that there are.
(09:20):
The taxable bucket, the tax deferred bucket, and the tax-free bucket. Everything that you're putting into a traditional 401k is in the tax deferred bucket. You don't have to pay tax on it. Now it grows without being taxed, but when you pull it out in retirement, you have to pay tax on it. Tax-free bucket is money you've already paid tax on, but it too grows without being taxed. And when you pull the money out, you're not taxed on it. And if you want to be able to control taxes in retirement, you need to have have that tax-free bucket available to you. It doesn't have to all be in tax-free, but you need to have a tax-free bucket to compliment the taxable bucket. And now more and more 4 0 1 Ks enable you to make Roth contributions. And so if you're taking a look, if you're doing a year end 401k review, take a look and see if your plan offers a Roth option, and if it does, evaluate whether it makes sense to shift some or even all of your contributions over into that Roth bucket and start building up that tax-free aspect.
Speaker 3 (10:26):
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Speaker 2 (11:52):
Lots of great
Speaker 1 (11:52):
Information. 4 0 1 Ks. What's your 30 minute action item?
Speaker 2 (11:55):
30 minute action item is review your 401k allocation and your contributions.
Speaker 1 (12:01):
There you have it. Thanks for joining us. 30 minute Money three zero minute dot money. Steve Wershing can be found at Focused Wealth Advisors and you see a link to his calendar down in the show notes. We will catch you next time on 30 Minute Money. Thanks for joining.