Time For A 401k Checkup

I’m going to go out on a limb here and make an assumption: You haven’t looked at your 401k allocation in months.

In fact, if you’re like most Americans, you probably haven’t looked at it once in 2015. If you’ve been at your company long enough, it’s likely you haven’t really looked at it in years. You probably check your trading account multiple times per week…or even multiple times per day. But your 401k plan…that workhorse that quietly plods along doing the heavy lifting of your retirement saving and investment…is just not exciting enough to bother watching.

Don’t feel bad. If it weren’t for the fact that I write about 401k allocations professionally, I probably wouldn’t monitor mine as closely as I do. There’s just nothing sexy about an account full of standard mutual funds.

But you should really take a good ten minutes today and give your 401k a good look. Because the decisions you make with your boring, plain-vanilla 401k plan are a lot more important to meeting your retirement goals that that sexy options spread or small-cap biotech stock you’ve been eyeing. As I wrote earlier this year, the humble 401k plan is the only investment vehicle I have ever seen that offers returns of up to 46% per year just for showing up…without putting a dollar at risk in the stock market.

So, before you close this article and get on about your day, I want you to log into your 401k site and do two things.

First, and most importantly, check your contribution levels. How much are putting in per paycheck…and can you afford to chip in more? You are now able to sock back $18,000 per year, and $24,000 per year if you are 50 or older. If you haven’t updated your contribution levels in years, chances are good that you’re contributing at a level far below this. Chances are also good that you’ve gotten a raise or two since then…and thus have more room in your paycheck to get closer to the maximum.

Remember, if you’re in a high tax bracket, you’re getting an effectively return of nearly 40% based on the tax savings alone. So put every dollar you can afford to part with into your 401k plan. I might be a little doctrinaire here, but I would go so far as to recommend you actually put in more than you can afford and spend down other, non-401k savings in the interests of stuffing more into the 401k plan. The net result is that you’re converting non-401k savings into tax-favored 401k savings.

Secondly, and nearly as importantly, check your current asset allocation. You don’t necessarily need to make any major allocation changes today, but at least be aware of what you own. Because with the US market broadly overvalued and looking more and more at risk, the time is coming when you’re going to want to get defensive. Have a few bond or money market funds scoped out so that when the time comes, you can take a little money off the table.

One of the nicest aspects of 401k investing is that, because contributions come out of your regular paychecks, dollar-cost averaging is automatic. That’s fantastic in a rising or sideways market. But in a real bear market, you’re better off allocating to cash and bonds, at least in the early stages.