Advice for Investing in Your 401(k) Plan

Do you want to build a more secure retirement?

Of course. We all do.

Unfortunately, navigating the world of 401(k) plans can be tricky. Many companies offer minimal guidance and advice about how to invest the hard-earned money that’s in your 401(k) plan.

There’s also a scarcity of information about overall retirement planning (outside of just your 401k).

In this article, we’ll show you how to maintain a “big-picture view” of your total financial situation — and how to use that framework to optimize your 401k.

Maintain a Holistic View of Your Finances

If you’re like most working Americans, your company 401(k) plan is the central focus of your retirement planning. While it’s important to make the right choices when investing in your 401(k), you should not think of “401(k) plan” and “retirement plan” as synonymous. Instead, think about a 401(k) plan as a part of your total retirement plan. And your retirement plan as part of your total investment strategy.

Having a holistic view of your investment plan, rather than compartmentalizing your 401(k), IRA and other investment accounts into separate buckets, will help you create an effective strategy.

Don’t Jump Into Selecting Funds

Why should your retirement planning stretch outside the bounds of your 401(k) plan?

First of all, not all 401(k) plans are alike. Some plans are great, and offer a wide selection of high-quality, low-cost funds and access to useful educational resources. But others have limited fund options, with a few funds in each of the major equity and fixed-income asset classes, plus some target date funds and little to no guidance about how to make the best choices. Without expert advice that tells you the best choices for your goals and situation, effective retirement planning will be a challenge.

Looking at all your accounts empowers you to select the best options based on fund availability, tax status, and other important factors.

Create an Overall Asset Allocation Strategy

Before focusing on the right fund choices for your 401(k), set your retirement goals and create an overall asset allocation strategy that’s aligned with your goals, and other considerations like your risk tolerance and timeline. The further you are from retirement, the more emphasis you want to put on growth-oriented assets that can provide a positive real (inflation-adjusted) return. As you approach and then move into the retirement years, that emphasis will gradually shift to income.

Consider the Pitfalls of Target Date Funds

Many people like to put target date retirement funds within their 401k plan. But these funds aren’t personalized to your goals, risk tolerance, timeline, and other unique factors.

Furthermore, they’re not optimized to take advantage of tax efficiencies through savvy asset location. (We’ll dive into that subject below). These funds cannot consider the other types of accounts that you have within your portfolio (such as taxable, tax-deferred, and tax-exempt), and therefore these funds can’t capitalize on location opportunities.

Make Intelligent Location Choices

Let’s say you have an asset allocation that’s split 60/40 between equities and fixed income. Does this mean that all your retirement accounts – 401(k), IRA and taxable investment accounts – should perfectly mirror that 60/40 split? Not necessarily.

Asset location is the practice of optimizing the tax-treatment (and other features) that are offered by different types of investment accounts.

For example, bond funds tend to be more tax-sensitive (on average) than equity funds. Interest on bonds gets taxed at a higher rate than long-term equity capital gains. And some equity funds are more tax trigger-happy than others.

So one good location strategy might be to concentrate more of your tax-sensitive investments in a 401(k) or traditional IRA, where they receive tax-deferred treatment. Leave your less tax-affected funds in your taxable investment accounts.

This means that your 401(k) and your taxable accounts won’t have the same allocation split. And that’s fine, as long as your overall allocation is aligned with your retirement goals and risk tolerance.

Manage Your Entire Portfolio as a Whole

Factors like asset allocation (that stock/bond split) and asset location (tax treatment) can have a major impact on the success of your 401k portfolio — as well as your investments as a whole.

Once you have sorted out your asset allocation and asset location, you will be in a position to make smart fund selection choices. This is the final piece of the puzzle.

Your portfolio is a suite of accounts, which may include your 401k, IRA, taxable investment accounts, and more. You’ll want to manage across all accounts, in order to optimize for tax efficiency, fees and other important factors.

Where to Get Help for Investing in Your 401k Plan

Where can you get advice for investing your 401k? Some large employers offer access to advice from advisors, but much of the advice may be cookie cutter, biased, or expensive. To get affordable help that first your needs, enlist the help of an unbiased, expert advisor such as Jemstep.

Jemstep is an online advisor that provides step-by-step guidance on how to invest your 401k that’s personalized to your needs. Plus Jemstep works across all your retirement and brokerage accounts not just your 401k to provide the type of holistic advice described in this article.

If you are already a Jemstep client, make sure you link all your different retirement accounts in order to get advice about your total financial picture – not just your 401k.

Retirement may still be a long way off, or it may be just around the corner. Wherever you are in the life cycle, get personalized advice for your 401(k) and all other components of your retirement plan.

Do you need 401k advice? Share your experience or thoughts in the comments.