7 Tips to Get the Most From Your 401(k)

by Dan Wiener | October 22, 2013 12:30 pm

penny stocks, young investors[1]The 401(k)[2] may well be the best investment tool ever for building long-term wealth, so I’m always surprised by how many people don’t take full advantage of it.

They make a few snap decisions on a hectic first day at a job, hand in the paperwork and they’re done.

Big mistake!

A casual “hands-off” approach like this could cost you literally hundreds of thousands of dollars by the time you retire. And that’s nothing to sneeze at!

Is it time to take a second look at your 401(k)? Here are seven ways you can maximize your retirement[3] savings starting right now — even if your plan only offers a few investment options. You’ll be amazed by the difference it can make!

Tip #1 — Start Investing for Retirement

There’s no time like the present to start investing. That’s especially true now that the new tax law has increased contribution limits for 401(k) plans and other tax-deferred plans in 2012. However, so many workers put off starting to invest till “later” — after the car is paid off, after the kids finish college, after the new house is purchased. The amount of time that you have money invested works in your favor — almost overshadowing the particular investments you choose. This is particularly important in your 401(k) account, since you are investing tax-deferred.

Tip #2 — Use Only the Best Funds Available to You

While most employers provide a limited selection of funds from which to choose for your 401(k) plan, you should not just put a percentage into each available fund. That’s not what we mean by diversification. Depending on the length of time unil you retire, you’ll likely want to invest most of your 401(k) plan dollars in stock mutual funds[4], and maybe a little in bond funds. It’s rare that money market funds or guaranteed investment contract (GIC) funds are appropriate for 401(k) plan choices. Yet every plan has one.

Tip #3 — Get Your Employer to Match

Many employers match a certain percentage of your 401(k) contributions. This is free money. You can’t do better than that. However, even if your employer doesn’t “match” contributions, you still will benefit from participating in a 401(k) program — your paycheck will be reduced by the amount of your 401(k) contribution before you pay taxes on your salary. The government doesn’t see that money, but you will!

Tip #4 — Check Out the Managers of Your Funds

Many people will look at the past performance of a mutual fund before placing any of their 401(k) dollars there. However, only a few look to see if the manager of that fund is still managing it[5]. One of the special things I do for the funds I follow is look carefully at the record of the current manager — and that of the funds the manager has overseen — and how the manager has performed for you. You should pay attention to this, too.

Tip #5 — Check Out the Fund’s Holdings

You might have seen a particular stock taking a jump recently. You feel awful, saying “I should have bought that stock.” But do you know you might already be a stockholder? Many top Vanguard mutual funds[6] — available in your 401(k) plan — might hold some of the stocks at the top of your list.

Tip #6 — Don’t Take on Too Much Unnecessary Risk

While most 401(k) investors might be too conservative in their choices, some of you might be too aggressive. The key is proper allocation among the funds available to you. I categorize all the Vanguard funds so I can see if I have too much money allocated to “aggressive growth” funds.

Tip #7 — Don’t Follow the Crowd

Don’t use a certain investment strategy just because “everyone else is doing it.” Remember: Rules on investing vary from plan to plan. Most of all, you should invest based on your own specific needs. Investment strategies are unique and differ based on investors’ goals for retirement, age, size of family, funds available to invest, etc.

Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors[7], a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.

Like what you see? Sign up for our Young Investors e-letter[8] and get practical investing advice delivered to your inbox every week!

  1. [Image]: https://investorplace.com/hot-topics/young-investors-series/
  2. 401(k): https://investorplace.com/category/mutual-funds-etfs/401k-investing-tips/
  3. retirement: https://investorplace.com/retirement/
  4. mutual funds: https://investorplace.com/category/mutual-funds-etfs/mutual-funds/
  5. is still managing it: https://investorplace.com/2012/08/3-longtime-mutual-fund-managers-earning-their-tenure/
  6. Vanguard mutual funds: https://investorplace.com/2014/05/best-vanguard-funds-review/
  7. The Independent Adviser for Vanguard Investors: https://investorplace.com/order/?sid=HK8361
  8. Sign up for our Young Investors e-letter: https://order.investorplace.com/?sid=YIS100

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