Money

The 401(k) Makeover

Gary Schatsky, a financial advisor in New York City, explains how to make the most of your retirement options

[ Updated: Jul 14, 2008 - 4:51:58 PM ]

What are the most common mistakes people make when investing in a 401(k)?
The biggest problem I see is not taking advantage of the company match. Why wouldn't you want what is essentially free money for your retirement funds?
Do whatever it takes to put in enough of your paycheck to maximize that company match, even if it means forgoing your daily venti double half-caff latte--it'll be worth it in the end. Another financial blunder people often make is not realizing that a 401(k) should be just one part of your financial plan. You have to diversify, not necessarily within the 401(k), but as part of your overall portfolio, which means playing to the strengths of your investments. So if your company's retirement plan has international funds that look good, take their international funds. Then, in your IRA or an old 401(k), invest in domestic stocks and bonds. Or vice versa. The key is to make smart investment choices so that you can improve your returns.

How should people choose among the various funds?
Look at your whole portfolio. People try to diversify every little pocket of money they have, but you should really be concerned with diversifying all of your assets. In many respects, it's the same way you should approach any investment. Take a look at the fund performance and the expenses, and then pinpoint the weaknesses. If there are weaknesses, fill in those assets elsewhere.

What happens when you change jobs?
The last thing you should do is cash out your 401(k) and pay all the taxes and penalties that come along with doing so. You'll be paying taxes at a higher rate than you ever got a deduction and you'll have many decades to regret your decision. What the majority of people should do is roll it over into an IRA. The reason? By moving to an IRA, you'll increase the quality of investment choices you can make. Occasionally, companies have negotiated attractive investment choices, such as an institutional class share or a closed fund. If you're one of the lucky ones, then take advantage of that option. Otherwise, roll it over into an IRA and keep it put. This will help you achieve that diversity I was talking about.