Get help with your 401(k)

You don't need to rely on iffy advice from your friends or family. Your plan offers far better options.

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By Walter Updegrave, Money Magazine senior editor


(Money Magazine) -- When Chicago consulting firm the Spectrem Group recently asked more than 400 people how they make their 401(k) investing decisions, 21% - and fully 44% of those under 35 - said they turn to friends and relatives for advice. Hey, I've heard of a friends-and-family cell-phone plan. But do you really want your retirement prospects riding on odd Uncle Otto's mutual fund picks?

Obviously, the answer is no. There's too much at stake. Missing out on just one percentage point of annual return over your career can reduce the size of your nest egg by 20%. Fortunately, your 401(k) plan likely offers you enough ways to get help so you can ignore Uncle Otto.

Use online tools. To successfully manage a 401(k) on your own, you have to do two key things: create a diversified blend of stock and bond funds and then rebalance annually.

Alas, many people fall short on both counts. Last year, according to benefits consultant Hewitt Associates, employer shares were the single largest holding in 401(k) plans that offer company stock, representing 22% of assets - a far too risky concentration. And Hewitt surveys find that fewer than one in five people make even a single transfer among their 401(k) investment options in a given year, which suggests that rebalancing is an alien concept to most 401(k) participants.

Still, with just a modest effort, you can go it alone, especially because today most 401(k) investors can get free advice. Many plans provide online calculators that show you how different mixes of stocks and bonds might affect your portfolio or your retirement income. Some plans will automatically rebalance your funds.

Invest in a target-date fund. Maybe you're not inclined to give your 401(k) the attention it needs or you doubt your investing skills. No problem. Your 401(k) likely offers another way for you to get investing help: a target-date retirement fund. You simply pick a fund with a date that corresponds with the year you plan to retire - 2020, 2030 - and you'll get a fully managed portfolio of stocks and bonds that's appropriate for someone your age.

The trouble with target-date funds is that the asset mix may not be right for everyone that age. If you're 50 and you'll retire with a traditional pension, you can afford to invest more aggressively. Or you might need to coordinate your 401(k) funds with outside investments. A target-date fund falls short in both cases.

Hire a manager. In a growing number of 401(k)s, you can turn over your account to an outside investment firm such as Financial Engines, Guided Choice or Ibbotson Associates. The advantage of a managed account: You can get an asset mix and investment picks that better reflect your individual needs.

As appealing as this option may be, consider two things before signing up. One is fees, which can run as high as a full percentage point a year - and that's on top of what the funds in your plan charge. Many employers or providers, however, pick up part of the cost. So it's possible that you'll pay only slightly more - or even less - than with a target-date fund.

To get the most out of a managed account, you must be willing to provide details about your overall finances. If you resist sharing information about your spouse's pension or your three IRA rollovers, your managed account may effectively amount to little more than a glorified target-date fund.

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