This is the time of year when most companies allow workers to make changes to their health care benefits for next year. While you’ve got benefits on your mind, it’s a good time to ensure you’re getting the most out of another hugely important benefit: your retirement accounts.
You’re not limited, of course, to an open enrollment period for retirement benefits – but the fourth quarter is a good time to review your portfolio.
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The strong bull market in recent years has pushed balances up for most savers. Whether or not that continues, it’s still worth making sure you’re following these best practices:
ONE: Don’t leave free money on the table.
You should be contributing enough to your retirement account to at least get any match offered by your employer. A recent Fidelity survey found that 79 percent of workplace savings plans offer some type of employer contribution, with the average employer contributing 4.3 percent per employee.
“Not getting your full employers’ match is choosing not to cash part of your wage check,” says Anthony Webb, a research economist at the Center for Retirement Research at Boston College.
Most companies require their workers to put a portion of their own money into retirement savings to be eligible for that contribution. Not putting enough money into your retirement account to get that match means you could be missing out on thousands of dollars (the average employer contribution, per Fidelity, is $3,540) each year.
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TWO: Choose your funds carefully.
Most companies offer target date retirement funds as the default investment option for employees who are auto-enrolled in their savings program. Such funds are set up to allow employees to invest 100 percent of their account into one fund. It automatically rebalances its investments and stocks and bonds to become less risky as employees approach retirement.
The funds are a decent option for young savers and investing novices (it can be a less intimidating way to begin saving for retirement), but they’re not without their detractors.
If you’re more inclined to select investment options on your own, then use an online asset allocation calculator to determine an appropriate blend of stocks and bonds. Look for diversified low-cost funds, ideally with low fees.
“Employees should be mindful of the fees they’re paying when they buy a mutual fund or trade a mutual fund,” says Bruce Elliott, manager of compensation and benefits at the Society of Human Resource Management.
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THREE: Consider a Roth.
About half of all companies now offer a Roth 401(k) option, nearly five times the percentage that did so seven years ago, according to Aon Hewitt. These accounts allow investors to pay taxes upfront on the contribution but make tax-free withdrawals in retirement.
These accounts are often a good fit for young investors, since their investments will have decades to grow tax-free. The taxes paid now will also likely be less than those paid in retirement.
FOUR: Get professional help.
If the idea of selecting your own investments seems overwhelming, you may be able to get some free assistance. Companies are increasingly offering a consultation with a financial advisor as part of the benefits package they give employees.
If your company offers such a perk, use it. “Our data shows that people who take advantage of independent, professional 401(k) advice tend to increase their savings rate, are better diversified and stay the course in their investment options,” says Catherine Golladay, Charles Schwab vice president of 401(k) participant plan services.
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Working with an adviser, especially one provided for free by an employer, can also help savers understand the plan’s literature, which can be complicated or overwhelming. Nearly three-quarters of 401(k) participants read their plan materials, but four in 10 find the information difficult to understand, according to a recent report by Natixis Global Asset Management.
FIVE: Step up your contribution.
Unless you’re already hitting the federal contribution limits ($18,000 in 2015, plus $6,000 for savers over 50), you should probably be putting more money into your 401(k).
But you’re certainly not alone. Last year, just 13 percent of people eligible for a workplace retirement account saved the maximum amount, according to a recent Vanguard report. In some cases, employers set contribution limits below the federal limits.
One easy way to increase the amount you’re socking away is to sign up for auto-escalation, a benefit offered by many employers. It will automatically ratchet up your contribution by a pre-determined rate every year. If you don’t want to commit to that, consider increasing your contribution manually whenever you get a raise; that way it will be less noticeable in your paycheck.
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Whatever you do, don’t cash out the plan, which can trigger steep penalties and significantly erode your long-term savings potential.
SIX: Don’t abandon it.
As the job market has begun picking up, more people are finding new jobs – and that means more 401(k)s are qualifying for rollovers into the new employers’ deferred plans. While there are many options for employees, many people choose to take their money with them to the new deferred plan. Others roll the 401(k) into an IRA, which offers more investment options but may carry higher fees.
SEVEN: Sync your strategy.
If you’ve got retirement savings outside of your 401(k), or your spouse uses a separate 401(k) plan, consider all your accounts as part of one portfolio. If you have great, low-cost bond funds available in your 401(k), for example, but less stellar equity options, load up on the bonds funds and get your stock exposure elsewhere.
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