One of the most common mistakes investors make is investing your 401(k) plan independently from the other investment accounts in your portfolio. The 401(k) plan often is treated as an “out-of-sight, out-of-mind” investment even though it is typically the largest place investors deposit each month. Many investors just add money into the plan that was created when they first were eligible to contribute and do not pay attention to how that account fits into the overall retirement plan as it grows.
There are a few things to consider when evaluating your 401(k):
First, look at all your assets as one portfolio. Don’t underestimate the importance of your 401(k) plan in the big picture of your total investment portfolio.
Second, include your spouse’s 401(k) plan in your investment asset allocation. Many 401(k) plans offer the same menu of investment choices. Coordinate your plan with your spouse’s to take advantage of the best possible offerings in each of the company sponsored plans.
Third, invest your 401(k) plan along the same investor profile as your other investments. Make sure to be aware of your risk tolerance, time horizon and overall investment goals when selecting investments.
Next, ask your financial advisor to evaluate your company-sponsored 401(k) and help you model it in alignment with the rest of your investments. There are many advisors and programs that allow you a third-party recommendation on investing your 401(k) so that it works best for you and your overall plan. You don’t need to only rely on your plan administrator or plan advisor for information.
Lastly, be sure to monitor your 401(k) plan as often as you monitor your other investment accounts. Active monitoring and rebalancing is important to keeping your 401(k) plan in alignment with your personal financial plan. Be willing to modify and rebalance if necessary. Often, the 401(k) plan is the best place to rebalance because you don’t have to be concerned with tracking cost basis or paying tax on capital gains.
Overall, it is important to consider your 401(k) plan as an investment in your future. Continue to fund it, pay attention to any changes that arise, coordinate it with your other investments and focus your efforts on choosing the best available options. The time and energy you put into creating a good investment plan with be well worth it upon retirement.