How to Manage Your 401(k)
401(k) is a qualified pension plan in the United States sponsored by the employers with the goal of helping employees save for their retirement. For every pay period, the employee’s 401(k) contribution is automatically deducted from their paycheck and contributed towards the 401(k) plan. The money is withdrawn and contributed towards the 401(k) before the employee's salary is taxed. This also makes it an important vehicle for tax saving. Another big benefit of 401(k) plan is that for every dollar you invest in 401(k) up to 6% of your salary, your employer also contributes something to match that contribution. Any amount matched and contributed by your employer is literally free money and employees should take full advantage of it.
The money in 401(k) plan is invested in a choice of funds made available by your plan provider. You as an employee have to choose which are the best funds for you to invest in. This is a tough area as all employees may not have knowledge of how to make the best investment choices and which funds are good for their financial needs. So, you are responsible for managing your 401(k) and thereby how much you can grow the fund for your retirement. Let’s look at a few ways you can effectively manage you 401(k) for maximum benefit.
Hire a Financial Advisor
If you don’t want to spend time on learning about investments, one option is to hire a financial advisor who can help you manage your 401(k), assess your needs and advice you on the funds to invest in. He may also monitor your funds and re-balance the portfolio from time to time depending on the changing investment scenario and your own financial status. Most financial advisors will charge you a fee for their services.
Learn Basics of Investing
Another way is to learn the basics of investing and select the funds and manage your 401(k) yourself. This can help you reduce the fee, be more educated about the whole investment scenario and feel more in charge even if you are working with a financial advisor.
Use a Robo-advisor for 401k
Over the past few years how people invest and manage their 401(k) has been changing rapidly and many people are placing their trust on robo-advisors to invest their money on their behalf. As the name suggests, a robo-advisor is an automated, online portfolio management service. These robo-advisors use computer algorithms and make the best investment decisions for you based on your risk tolerance, the period of investment and other aspects of your profile. Since the process is automated and decisions are made by computers rather than human financial advisors, the robo-advisor services can be availed at a fraction of traditional costs.
During our research we found, Blooom to be a good choice as a robo-advisor for 401(k) plans. Blooom works within the investment choices offered by your plan. It even offers a free analysis of your 401(k) so that you can review their service before opening an account. Here are a few benefits offered by Blooom:
- You can link you 401(k) account and get a free analysis. This can help in many ways such as how much you are losing in hidden fees. The analysis also uncovers your stock and bond mix and tells you about whether you are being too aggressive or conservative. You can also benefit from understanding the opportunity cost if you had used Blooom vs. doing it yourself.
- It works within the investment choices offered by your plan. It doesn’t matter where your work and where your account is held. Blooom has the ability to manage it.
- You also get access to financial advisors who can answer all your financial planning questions.
- Blooom can automatically rebalance your portfolio regularly
You can open an account for a flat monthly fee of $10 and avail all these services. So, while you focus on your job, you can be stress-free by letting Blooom manage your 401(k) investments for you.