3 Actions That Help You Reap Big Rewards on Your 401(k)

Contributing to a 401(k) is great. But you need to do more to ensure you reap the plan's full benefits.

Participating and contributing to a 401(k) plan at work provides you with a significant advantage over someone who is not eligible to participate or whose employer does not offer such a plan.

However, just contributing is not enough. You need to take full advantage of your plan to ensure your account grows throughout your working years. Maximizing your plan’s benefits will give you a better chance at a successful retirement.

Whether you have participated for many years or are just now entering your company 401(k) plan, the following three things can help ensure you are doing the right things now so you can reap the rewards later:

  1. Ensure your investment allocation is aligned correctly
  2. Take advantage of the company match, if available
  3. Maintain at least 50% in stock mutual funds

Ensure Your Investment Allocation is Aligned

When you first set up your 401(k), you need to choose how you want to allocate your contributions amongst the various investment choices available in the plan. Many who have existing balances do not realize they have to make two decisions.

The first decision is how to invest new contributions into the plan. The second decision is whether to change the existing allocation.

While there could be times when the existing allocation should be different than the allocation of new contributions, most investors will probably want the allocations to be the same.

It’s easy for a portfolio to fall out of balance. Ensure that the allocation of your existing investments and your new contributions are appropriately aligned to meet your goals. Evaluate your portfolio annually to ensure you stay on track and rebalance if necessary.

Take Advantage of the Company 401(k) Match

Many employers incentivize employees to contribute to their 401(k) plans by matching the amount the employees contribute, usually up to a certain percentage.

If your employer offers a matching program, you should try to contribute enough to realize the maximum amount your employer will match.

Many employees don’t take advantage of this opportunity because they don’t think they can afford to contribute more to the plan. They may not realize that the reduction in their net pay is less than the additional amount they will contribute to their plan. This savings is a result of contributions to a 401(k) plan being considered pre-tax.

For example, contributing an additional $100 to your 401(k) plan may only reduce your take-home pay by $70. The other $30 represents taxes that would have been withheld if the $100 were paid to you and not contributed to your 401(k) plan.

Once you understand this, you may want to take a second look at whether you can afford to contribute more to your plan to get the company matching contribution.

Maintain at least 50% in Stock Mutual Funds

The goal of a 401(k) plan is to save money for your retirement. Whether you are 40 years or five years away from retirement, your 401(k) plan’s portfolio should include a healthy allocation to stock mutual funds. Generally speaking, the recommendation is to maintain at least 50% of your portfolio in stock mutual funds, regardless of how close to retirement you may be.

Traditional advice suggests that you should become more conservative as you approach retirement and have more assets in bonds and cash.

Keep in mind that your investment time horizon after retirement can be as long as 25 years or more. Therefore, having too much fixed income will not provide you with the necessary income or growth to enable a successful retirement.

Instead, you should maintain a balanced portfolio to provide growth in the portfolio to help combat inflation, which can be your worst enemy in retirement.

Address these three important actions today, regardless of how close to retirement you are. Your 401(k) plan will thank you later.

This article previously appeared in the New York Daily News “Daily Views” column.

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