Your 401(k) plan balance changes constantly. You chalk up changes to general market conditions. You may not check your balance at all until your statements arrive – and even then, you may not care.
If this description reflects your attitude, you may be leaving money on the table. Without any frame of reference, how do you know if your 401(k) is performing as well as it could? Here are some relatively simple comparisons to get you started on evaluating the performance of your 401(k) plan.
- Returns – Annual returns and year-to-date (YTD) returns should be readily available, but without a frame of reference, they are not terribly informative.
Retirement accounts are designed for long-term investing by definition, so you want to look at longer-term investment performance – preferably five and ten-year data – and compare them to the performance of your other investment options, as well as the overall market. Does your investment keep up with or surpass the market, and do you see signs that the trend is likely to continue?
- Investing Options – Options within a 401(k) are often limited for convenience, but the plan must offer at least one option that addresses your financial goals. (If you have not defined your financial goals, start there.) Look over the descriptions, holdings, and past performance of your investment choices and gauge that against your need for returns and tolerance for risk.
- Fees – Excessive fees can be insidious drains on your 401(k). Every 401(k) has operating expenses and fee requirements, but you should expect proportionately better return for the fees that you pay.
Unfortunately, the fees are not always easy to decipher. While regulations require that information about the fees be “readily available,” there is no guarantee that they will be easily understood or simple to compare with other options.
Typical 401(k) fees include plan administrative fees, record-keeping/custody fees, and mutual fund expenses. These fees can add up to roughly 1-2% of your account balance – and while that may not sound like much, over the course of an average career, an extra percentage point in fees could easily cost you hundreds of thousands of dollars.
In the best case, the fees will be broken down into their components on your statement. If not, check the summary plan description and the annual report for information on the fees and expenses. Look for low expense ratios (annual expenses divided by the average value of the assets).
Fees and expenses are not inherently bad, but the important point is to evaluate whether or not you are getting value for your investment dollar.
- Advice – What sort of investing advice is available to you through the 401(k) sponsor? Are you able to speak to qualified individuals from the plan, and what are their qualifications? Are they able to address your individual goals and concerns or can they only address the plan’s performance?
If you are dissatisfied with the advice you receive, make this known to your employer. They may be able to apply pressure and affect change.
If you decide your 401(k) plan is inferior and the company is not inclined to change it, consider opening your own. Just open an IRA or similar retirement plan and contribute funds to that instead – although you must take into account any company matching plans that compensate for lower returns or higher fees.
You would not accept receiving poor value when you purchase a house or a car. Give your 401(k) the same critical eye. It is most likely one of the largest financial accounts you will ever handle, so give it the scrutiny it deserves now. Do not wait until you approach retirement, and then be forced to wonder where your money went while you scale back your retirement plans.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
Winnie Sun is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners, a registered investment advisor and a separate entity from LPL Financial.
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