3 Easy Ways To Tune-Up Your 401(k) For Spring

Like every other important investment in your life, a fresh spring look can help you make small but important adjustments that pay off down the road.

Spring has finally sprung for most of the country after what was a winter to remember.  What better time to take a good look at your 401(k)-type plan. Here are three simple tips:

Make A Rational Use of the Menu of Funds. Just because your plan offers 30 choices doesn’t mean that you have to invest in every fund. More is not better when arriving at
diversified allocation.

But how much do you put in each fund? Some people are naïve about diversification. If they have 10 selections, they invest 10% in each, which may sound rational, but isn’t.

Instead, split your money between stocks and bonds according to your age. Your percentage in income investments should roughly each your age. If you’re 25, for example, then 25% should be in bonds.

Although you have to be careful, millions of investors skip the allocation part and invest in “target date” funds that invest according to when you think you might retire. The closer you get to your chosen retirement year, the more money that’s allocated to bonds. If you’re fairly certain when you’re going to retire — and examine how the target-date fund is allocated — this might be a simple approach that works.

Become More Passive. Instead of loading up on actively managed funds, move as much money as possible to index funds. These baskets of securities are passive vehicles designed to capture market returns.

A recent study by the Vanguard Center for Retirement Research found that investors are gradually shifting to all-index portfolios. In a study of defined-contribution (401(k), 403(b), 457)
accounts from 2004-2012, the center discovered that only 19% of those surveyed had an “all-active” portfolio in 2012 — a drop of 51%. In contrast, 38% had an all-index line-up.

The shift to passive portfolios is great news for those investors who’ve made the change. Not only are they reducing fund costs by up to a factor of 10, they’re improving returns. Most active managers — particularly in U.S. stocks — don’t beat market averages, according to S&P Dow Jones Indices. And their higher expenses eat into returns.

Focus on Simplicity. Investing doesn’t have to be complicated, even though employers rarely make it easy for you. Here’s a sample line-up of index funds you can put into any portfolio if you’re not close to retirement.

* A total market stock fund. These vehicles sample most of the U.S. stock market from small caps to mega caps like Apple (AAPL).

* A total bond market fund. Buys everything from government to corporate bonds in the U.S. market

* A total international/global stock fund. Invests in companiesoutside of the U.S., including emerging markets.

* A real estate fund. Investing in companies like real estate investment trusts, this will give you some yield and exposure to commercial real estate, which typically doesn’t move in lockstep with stocks.

These three steps can help you streamline your fund selection and improve returns over time.  Today is the perfect time for your annual spring tune-up.

FM International Services (NY), Ltd. provides a wide range of retirement services featuring customized benefit plans, flexible investment options, and
centralized pension administration. Through Fmi’s countless services, businesses of all sizes create unique domestic and international retirement
plans for two employees or two thousand – with a single provider handling conversion, setup, and administration.


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