5 Strategies for Managing Your Employer-Sponsored Retirement Plan
5 Strategies for Managing Your Employer-Sponsored Retirement Plan
By: Stacey Nickens
Pension plans have traditionally funded many American’s retirements. However, pension plans are becoming increasingly uncommon. In their absence, more retirees are relying on 401(k)s, 403(b)s, or 457 plans. However, I often find that individuals do not take an active role in managing or reviewing their employer-sponsored retirement plan. Your employer may offer management services that make it unnecessary for you to actively manage your plan. Your employer may instead allow you to select investments from a small range of options. However, individuals often forget to check their 401(k) plans after making the initial investment decisions.
In order to ensure you’re on track for retirement, it’s important for you to both contribute to these employee plans and to remain aware of the plan’s performance. Accordingly, I am going to review a few strategies to help you maximize your investments in your employer-sponsored retirement plan. Please note: I will be using the term 401(k) to refer to a number of different types of employer-sponsored retirement plans, including 403(b)s and 457 plans.
1. Regularly increase your contributions to your 401(k). Start with contributing any amount that you can afford. The power of compound interest means that small contributions can increase significantly over the course of many years. If possible, I would contribute up to your employer’s matching contribution limit. For example, pretend your employer matches up to 2% of your $60,000 annual salary. Your employer will thus match your contributions up to $1,200. I would then aim to contribute at least $1,200 to your retirement account each year.
See if you can sign up for an “auto escalation” feature on your account. Doing so allows you to increase your retirement plan contributions by a predetermined amount at a predetermined time. For example, you may be able to automatically increase your contributions by 1% each year. Those who choose to opt out of this feature should decide on an annual time to review their 401(k) and increase their contributions when possible.
2. Review each ETF’s or mutual fund’s expense ratio. You can use a free tool such Yahoo Finance to review the fund’s data. A higher expense ratio reduces your take-home returns. Index funds and ETFs often offer lower expense ratios than actively-managed funds. If you have a range of options, try to choose from the options with lower expense ratios.
3. Review returns and holdings. While you’re doing research, look into a fund’s annual return. Yahoo Finance allows you to see a fund’s returns over various time periods. You can also compare the fund’s returns with the returns of an associated index. Knowing your fund’s returns will help you estimate if your 401(k)’s investments will meet your growth target. You should also know your fund’s largest holdings. Make sure you’re gaining exposure to healthy companies and industries.
4. Consider a mix of “COVID” and “post-COVID” investments. Think about what companies or industries may be benefitting from “stay-at-home” investing. What services are people using more frequently now that they work and entertain themselves at home? You may look into streaming services, cloud-based services, home improvement companies, and others. You can gain this exposure through a fund that holds these companies or through individual company stocks. In addition, positive vaccine news may bolster the performance of more traditional investments at the expense of some of the above growth investments. Those moments may decrease the valuations of tech and mega-cap stocks, making them more affordable and attractive to buy. With the possibility of a vaccine on the horizon, you could also look at investments in areas that may bloom in a post-COVID world. Many of these hard-hit industries currently offer discount investment opportunities. Overall, you can create more diversification in your portfolio by looking for investment opportunities that could shine in the current economic environment as well as those that could shine as the economy heals.
5. Annually review your 401(k). During this review, you can see if any of your funds or stocks significantly underperformed your expectations. You may choose to remove these investments from your portfolio in favor of stronger investments. You may want to set a growth target for your plan and make adjustments if you don’t hit that growth target. You can also aim for a certain sector allocation and rebalance when your account strays from this allocation.
However, you don’t want to become too stressed about your account’s daily performance. Make sure to step back from the account for chunks of time. Let your investments do their work. Growth takes time, and constant rebalancing can both drive up your trading fees and hinder your growth.
I also encourage you to reach out to ELM3 if you would like additional assistance in making decisions about your employer-sponsored retirement plan. We can review your plan’s performance in light of your financial goals. Our discussion can help you better determine what strategies will best meet your needs.
