MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
TAKE CHARGE OF YOUR 401(K) PLAN - ANSWERS TO FREQUENTLY ASKED QUESTIONS
(August 4, 2005) — One of the best ways to boost your retirement savings is to contribute to a 401(k) plan. These plans are self-directed, which means you are responsible for choosing how your funds are invested and for managing your plan. The choices you make impact the return you get at retirement. To help you take charge of your 401(k) plan, the Virginia Society of CPAs offers answers to several frequently asked questions.
How do I know which funds to invest in?
Some employers offer only a few investments to choose from, while others provide dozens of choices. Research has shown that the percentage of your portfolio that you allocate to different asset categories — stocks, bonds and cash equivalents — is a greater determinant of your plan’s performance than the actual stocks or funds you choose. The asset allocation that is best for you depends on your personal objectives, your risk tolerance, and how long you have until retirement.
What about risk?
Generally speaking, the longer you have until retirement, the more you should invest in stock mutual funds. Investing in stocks exposes you to the volatility of the market, but over the long term, stock funds have shown the greatest potential for gains. As you approach retirement age, consider shifting your allocation toward more conservative investments. But retain some stocks for the continued growth of your retirement portfolio.
How can I reduce my investment risk?
While it’s impossible to completely avoid risk, diversifying your investments can help reduce it. For example, don’t invest all of your 401(k) funds in one fund. This includes your company stock. You are already dependent on your employer for your job — don’t compound your risk. If your company falls into tough times, you might not only lose your job, but a good part of your retirement savings as well.
How can I track investment performance?
It’s your responsibility to monitor your investments. Most plans provide quarterly reports and some offer a toll-free number or online access to up-to-date balance figures. Carefully review your balances and compare your funds’ performance to performance averages for the types of funds you own.
Periodically, you should compute the percentage you have in each fund to be sure that your asset allocation remains within your goals. If one asset type has performed exceptionally well, you may need to rebalance your investments to maintain an appropriate asset allocation.
What if I don’t like the investment choices my employer offers?
It is your employer’s fiduciary responsibility to provide competitively performing funds. If you’re not happy with the choices available, speak to your employer.
How often can I change my investment choices?
That depends on your plan. Some plans allow you to change your investments every day; others have fixed dates on which you can make changes. Still others allow a fixed number of switches per year and you may choose when to make them.
What happens to my 401(k) plan if I leave my present employer?
Employees who switch jobs have several options. If the vested account balance is more than $5,000, you can leave your money in your former employer’s plan. Another option is to roll the balance into your new employer’s 401(k) plan or into a rollover IRA. To avoid paying taxes, arrange to have the money transferred directly between plans.
How can I get help?
A CPA [and a CERTIFIED FINANCIAL
PLANNER™ professional] can provide valuable guidance
to integrate your retirement investment strategies with your
overall financial plan.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
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