While the 401(k) plan is the most common employer-sponsored retirement plan in the United States, there are several other plans including the 403(b), 457(b), and 401(a). Since you may have your retirement plan for decades, even small improvements can make a sizable impact on your account balance over time.
1. Avoid the “default” savings rate
The majority of people set their savings rate at or below the rate to earn the full company match. Many experts suggest saving between 15-20%, so make plans to increase your savings rate since many people can’t save that much initially.
2. Use the automatic annual increases
Many company retirement plans have a voluntary automatic increase that you can use to automatically increase your savings rate each year. Use this option to automatically increase your savings rate by 1-2% each year.
3. Choose wisely between Traditional and Roth
While only 14% of participants invest in a Roth retirement plan, there are substantial benefits to doing so. A Roth is often a good choice if you anticipate being in the same or higher tax bracket when taking retirement distributions. If you’re in the early stages of your career or anticipate moving into a high tax bracket, you should consider a Roth. While the Roth does require you to pay taxes on your contributions, it may save you significantly more in retirement.
4. Avoid unnecessary fees
The easiest way to avoid unnecessary fees is to review your investment options and choose low-cost index funds. If your plan doesn’t have good, low-cost funds, consider saving enough to get the company match and then saving additional money in an IRA where you’ll have more fund choices.
5. Know your time horizon
How you allocate your assets between stocks and bonds plays a key role in your investment returns, and how long your money will be invested is the most important factor in determining your asset allocation. Since many people greatly underestimate the length of time before they’ll use investments in their retirement account, they invest too conservatively and miss out on higher returns. Know when you’ll need your money and invest accordingly.
6. Use catch-up contributions
Beginning in the year you turn 50, you can make catch-up contributions ($7,500 in 2023) in addition to your maximum annual contribution ($22,500 in 2023). This is a great way to accelerate your savings as you head into retirement.
7. Don’t view your 401(k) as an island
You can simplify account management and increase investment returns by managing your invested assets as one whole rather than as unrelated parts. For example, if your company retirement plan has a good US large company fund but a poor US small company fund, you can invest more of your retirement plan in the US large fund and more of your IRA in a US small fund. You want an appropriate asset allocation and consistent investment strategy across your combined assets rather than within each account.
8. Choose better funds
The average number of investment funds in a company retirement plan is 17.5 and the average number of funds used by participants is 2.5. Many investors use a single target-date fund, which can be a good solution for those who don’t want the hassle of managing their own portfolio. Most target-date funds are well-diversified and auto-rebalanced. Some are expensive and often too conservative leading to reduced returns so you want to consider if a target-date fund is the best option for you.
9. Rebalance periodically
Since asset allocation is a key factor in investment returns, it’s important to rebalance your portfolio 1-2 times each year. You’ll earn more if you don’t just set it and forget it. You can also reduce your risk exposure by not letting your asset allocation drift aimlessly. For example, if your target allocation is 60% stocks/40% bonds, it may have grown to 72% stocks/28% bonds as stocks grow. By rebalancing, you sell some of your appreciated assets and buy less appreciated assets, effectively selling high and buying low.
10. Move funds from a former employer’s plan
If you have money in a retirement plan with a former employer, you may consider moving your account to get access to better funds and to simplify your account management. You can move funds to your current employer’s plan or to an IRA.