9 Steps to 401(k) Success

Investing Retirement


4 min. read

The 401(k) plan is becoming one of the largest sources of retirement savings for many American workers. According to the Society of Professional Administrators and Recordkeepers (SPARK), over 55 million people participate in 401(k) plans. If you participate in a 401(k) plan, the good news is that you have more control over your retirement money. The bad news is that you have more control over your retirement money.

For people who do not have the time or the financial knowledge, managing your 401(k) plan can be a daunting task. Moreover, if you do not manage it properly, the 401(k) may not help you pursue your retirement goals.  

Here are 9 steps that may help you with your 401(k). 

1. Participate

The dollars in your 401(k) plan may be a portion of your income at retirement. The government, and by extension, your employer, are giving you the opportunity to take advantage of two very powerful financial concepts: the ability to save money on a pre-tax basis, and the tax-deferred, compounded growth of those dollars. Saving money before it is included in your taxable income may reduce your annual tax bill. 

Some employers offer matching funds as an incentive for employees. If your employer is willing to give you money, you should consider taking advantage of the benefit. The only catch is that you may need to contribute some of your own money in order to receive the company match. 

2. Determine Your Investor Profile

Investor, know thyself! Every investor is different and knowing yourself is the first step to being comfortable with your overall strategy. Remember, 401(k) money is retirement money and everybody has different dreams about what their retirement will entail – traveling, boating, etc. But how comfortable are you with market volatility? Will you really be able to tolerate the inevitable ups and downs with the financial markets?  

3. Allocate Appropriately

Asset allocation is the principle of deciding how to spread your investments across various asset classes, such as stocks, bonds, and cash. The idea is to diversify your holdings in order to potentially increase returns while managing risk. A variety of factors determine the appropriate allocation for each individual – When you need the money, how much money you have now and expect to need later, what kind of risks you’re willing to take, and what other assets you have invested outside of your 401(k). Perhaps the most important factor is your time horizon – the more time you have, the more aggressive you can be.

Asset allocation and diversification are approaches to help manage investment risk. They do not guarantee against investment loss. 

4. Limit Exposure to Company Stock

Company stock can be a double-edged sword. On one hand, as a loyal employee who understands the business, you want to participate in the growth of the company by being a shareholder. On the other hand, it is risky to have too much of your portfolio in one stock. Having too much money in a single stock issue can create a non-diversified portfolio.  

5. Reallocate Tactically 

While it is not advisable to move your money around daily, it is advisable to look at what your investments are doing from time to time. If one segment of the market has outperformed other segments, then your portfolio may no longer reflect your overall risk tolerance. Take a disciplined approach to monitor your investments.

6. Don't Panic

Listening to the evening news, and hearing about the market changes on a daily basis, can cause even the most stalwart of investors to get nervous occasionally. Stocks fluctuate in value, it’s the nature of the beast. Just remember that you are investing in your 401(k) for the long term. There will continue to be dips and swings. Selling when your investments are down may not be the best approach. Patience can be a virtue. 

7. Know Your Plan Features

Every 401(k) plan has unique characteristics. To help maximize your plan, you need to know all your choices. Your plan documents, distributed by your benefits department, will outline choices such as hardship withdrawals, loans, vesting schedule, limitations to moving money, and in-service withdrawals. Read this document carefully or have a financial professional review it with you. 

8. Borrowing Capabilities

Many providers have loan provisions as an incentive to encourage greater participation – participants would be more likely to save for retirement if they could access the money before they retired. Some people believe that if the interest rate on the 401(k) loan is less than they would have to pay elsewhere, the 401(k) loan is a good deal.  That may be, but it does not take into consideration the potential opportunity cost.  The money in your plan cannot grow if it is not there!
If you do some calculations, you may find that borrowing from your plan may make sense. But it’s wise to consider all your choices.

9. Consider Tax Consequences of Your Actions

Most of the things we do in our financial lives have tax consequences. For example, if you leave your current employer, and decide to take a distribution from your 401(k), you may have a taxable event and perhaps pay an early withdrawal penalty. You have four choices with your 401(k) when you leave your employers, and it's best to explore each choice before making a hasty decision. A financial professional can help you weigh the pros and cons of each choice.

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 *Non-deposit investment products and services are offered through CUSO Financial Services, L..P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor.  Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

Before deciding whether to retain assets in an employer sponsored plan or roll over to an IRA an investor should consider various factors including but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.