Best steps to take with your 401(k)

Recent stock market highs can make any investor feel like a genius. The returns for 2013 have been terrific; since January 1, the S&P 500 Index has grown by more than 25 percent. And if you entered the market at its low in March 2009, you've more than doubled your return.

Financial planners will tell you, though, that the key to good investing isn't jumping in or out of the market at just the right moment. While that's great, it doesn't always work. A more sure-fire approach is patient, regular investments over time—the kind for which a 401(k) plan is well suited.

During the fall employee benefits open enrollment season is a good time to think about how to get that most out of your 401(k), whether you can invest the full, $17,500 allowed for 2014 ($23,000 for those 55 and over), or just a small portion of your paycheck. Some tips:  

• Take the free money and run. Invest the minimum needed for the full company match (often 6 percent of your gross income, for a 3 percent match). Put other savings in a Roth or a traditional IRA composed of low-cost funds. At 59½, you might also be able to use what’s known as an in-service, nonhardship withdrawal from your current employer’s 401(k). You roll over balances into an IRA with more choices; you still defer taxes while avoiding an early-­withdrawal penalty. With this tactic, you can still contribute to your 401(k) to take advantage of the match.
• Consider fees. As we've written, fees can erode your returns insidiously. Choose funds with low expense ratios—investing code for fees. If you don't know what your fund charges in fees, ask your employee benefits representative for the plan's annual disclosure of its expenses; the law requires 401(k) plans to publish these at least once a year and provide them to participants.
  
• Diversify but simplify. Consider a target-­date fund composed of low-cost index funds or a simple lineup of four funds—a large-cap equity, a small-cap equity, a bond, and an international—offering the lowest expenses compared with comparable portfolios. Target-date funds, sometimes called life-cycle funds, are actually collections, or “funds of funds.” They give diversification and will rebalance, or reallocate, your holdings automatically. Those that invest in low-cost index funds are a good default investment for many people. If the expenses of available target-date funds in your 401(k) are higher than a diversified basket of other options, though, go with the latter.
  
• Avoid too much company stock. If your plan match is in company stock, rebalance regularly to shift those shares to 5 to 10 percent of the total; it’s unwise to depend on the same company for your investment gains and your livelihood.
• Up your ante. Most people younger than 40 should have a combined contribution—what’s taken from their pay plus what the employer provides—of at least 10 percent of their income. If you’re older than 40 and behind on your savings goal, put away at least 15 percent.
  
• Even workers without the benefit of time can fatten their bottom line by slightly enriching their investment. A 57-year-old doubling a $3,000 contribution to $6,000 could raise his savings from almost $47,000 to $94,000 in 10 years, given an 8 percent annual growth rate. That’s not enough to sustain anyone for more than a few years, but it’s a start.

—Tobie Stanger

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