Review Your 401(k) Account

Managed properly, your 401(k) plan can play a significant role in helping to fund your retirement. The 401(k) has been much maligned during the recent market downturn, some of it justified. But the reality is that it can be a very solid retirement savings vehicle. Like any investment account, you need to ensure that your investments are properly allocated in line with your goals and tolerance for risk.

At least annually, you should thoroughly review your 401(k) plan. Some items to consider include:

Have your goals or objectives changed? Take time to reassess your goals and objectives, which can impact how much you contribute and how you invest those contributions. Calculate how much you'll need at retirement as well as how much you should save annually to meet that goal.

Are you contributing as much as you can to the plan? Look for ways to increase your contribution rate. One strategy is to allocate any salary increases to your 401(k) plan immediately, before you get used to the money and find ways to spend it. At a minimum, make sure you are contributing enough to take full advantage of any matching contributions made by your employer. In 2009, the maximum contribution to a 401(k) plan is $16,500 plus an additional $5,500 catch-up contribution, if permitted by the plan, for individuals age 50 and older.

Are the assets in your 401(k) plan properly allocated? Some of the more common mistakes made when investing 401(k) assets include allocating too much to conservative investments, not diversifying among several investment vehicles, and investing too much in an employer's stock. Saving for retirement typically encompasses a long time frame, so make investment choices that reflect that time period. Many plans offer Target Date or other pre-allocated choices. One of these may be a good choice for you, however, you need to ensure that you understand how this choice works and the level of risk inherent in it's investment approach.

Have you reviewed the allocation of your plan assets as part of your overall investment allocation? Far too often plan participants do not take into account other investments outside of their 401(k) plan, such as IRAs, a spouse’s 401(k) plan, or holdings in a taxable brokerage account when allocating their 401(k) dollars. Your 401(k) investments should be allocated as part of your overall financial plan. Failing to take these other investment assets into account may result in an allocation that is not in line with your financial goals.

Do your investments need to be rebalanced? Use this review to ensure your allocation still makes sense. Also review the performance of individual investments, comparing the performance to appropriate benchmarks. You shouldn't just select your investments once and then ignore them. Review your allocation at least annually to make sure it is close to your desired allocation. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without any tax ramifications. Many plans have a feature that allows for periodic automatic rebalancing back to your target allocation.

Are you satisfied with the features of your 401(k) plan? If there are aspects of your plan you're not happy with, such as too few or poor investment choices take this opportunity to let your employer know.