This past week marked the official beginning of a new era of transparency for 401(k) plans – mandated by new U.S. Labor Department requirements. Thursday (August 30) was the deadline for plan sponsors to get a notice to every plan participant regarding all costs of the plan, performance data on each investment option available through the plan, and the performance data of investment “benchmarks” (eg. the quarterly and annual returns of the S&P 500 Index, with which one can compare the performance of a large cap fund). To the average person, these disclosures should be obvious common sense; but one of the financial world’s “dirty little secrets” has been how extremely profitable 401(k) plans have been for companies providing such plans to employers – packed with countless undisclosed fees and expenses. Investment companies and employers have both been scurrying for many months making huge adjustments to existing plans in order to comply with the new regulation!
Now that you’ve been provided this helpful information, this is a great opportunity for you to review your plan in detail. Use the data in this required notice to do the following:
The U.S. Labor Dept. has created new regulations that took full effect at the end of August.
Photo credit: trenttsd, licensed through Creative Commons (on flickr.com)
1. Calculate the asset allocation within your own plan – what percentage of your total plan value is invested in stocks (domestic and international), fixed income (short-term, long-term, high-yield, etc.), annuities (fixed or variable), or money-market funds.
2. Review your financial goals and consider if your current allocation “fits” your goals and your time horizon (ie. how old you are relative to retirement, etc.).
3. Experts long ago concluded that one’s asset allocation determines at least 90% of the return of an investment portfolio, so reviewing your allocation at least annually is crucial.
4. Make absolutely certain that you are contributing at least the maximum amount that your employer will “match” each year. Contributing less than that amount is literally “turning down free money” – never a good idea.
5. Beyond the “employer match” amount, consider contributing even more each year, up to the amount allowed by law. For example, an employee of any age can contribute up to $17,000. If you are at least 50 years old, you can add an extra $5,500! You will save money on taxes and help fund a better retirement.
6. The amount you “defer” each year (ie. your 401(k) contribution) has been found to be the single most powerful factor in determining the success of your 401(k) – even more important than asset allocation!
This review process is so very important to your financial success that you really must make time (an hour or two should be more than enough) to look at your current plan investments and the choices your plan offers to update and improve the future return on your assets.
In just three months, you should be getting documents from your plan provider (employer) disclosing all fees related to the plan – from each fund’s “load” and annual expense ratio, to charges for managing the 401(k), joining the plan, leaving the plan, or securing a loan on plan assets. We’ll update you on that in November!
Submitted by Tom Petty of Examiner
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