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Fixing Your 401k. Fixing Your Retirement. Taking a Closer Look.

Several years ago I audited a friend's 401k at her request. What I found shocked me.

After reviewing her account and making several suggestions to fix the problems, I began wondering about my own 401k account. I audited my account as well, and although I didn't find the same problems, I did find some very disheartening issues.

As a result, I began making 401k audits a cornerstone of my money mentoring process for anyone I mentor on money issues. As I review more and more 401k investments for my clients and associates, I see many of the same problems.

The 401k or 403b Problems Overview

The 401k in for profit businesses or the 403b in non-profit organizations can be great retirement vehicles for your investing. However, many times people are not getting the full benefit out of these retirement tools, and that means they are missing out on a lot of money and may not be prepared for retirement.

Without getting into the weeds too much, let's look at a few things that will make or break your 401k and retirement plans.

  • No Real Plan. False Sense of Security. Unfortunately, many people begin investing in their 401k or 403b without any real plan for what they want to accomplish. The amount they invest in their 401k is usually driven by a few things. 1) What the employer will match (usually 100% up to 3-6% of your salary), 2) what is available in the budget. However, both of these are the wrong items to be driving your retirement investing, because they can both give you a sense that you are doing enough for retirement. If you want to be well prepared, then you need a plan.

  • Setup and Forget. Once the account is setup, it's seldom reviewed for performance by anyone. Since there's usually a financial advisor attached to the program, that can give the investor a false sense of security. Once the account is setup, no one looks at the account to review the performance to make sure the investments are on track for the employee. The company is busy making money, the investment advisor is busy collecting money and fees, and the employee is busy working. All of this results in under performing account and lower overall wealth being generated.

  • Bad Financial Advice. Lack of Investment Understanding. Many 401k and 403b investors don't take time to really understand how the program works or the investments that they are making. Sadly, many companies are very lazy when it comes to helping educate their employees when it comes to the 401k and 403b retirement plans. Often, poor or conservative performing investments are chosen resulting in lackluster growth.

  • Fees. It's important to understand the fees related to your plan. Many investors don't realize or review 401k and 403b fees associated with their plans, and these fees can make the 401k or 403b a bad investment option. has a great overview of 401k fees.

Fixing Your 401k

The good news is that once you understand some of the common problems with the 401k and 403b, it's not hard to fix them. It just takes a little bit of time.

  • Have a Plan. You need a retirement plan. You need a goal for how much money you need when you're ready. A couple of key goals you need to answer are paying off your house before retirement, insurance needs, living expenses. I recommend setting a goal of being a millionaire in your 40s so that you'll have a net worth of $2-3 million in your 60s. It may sound like a crazy goal, but it's doable. If you're a little behind, then just change the plan so you can catch up. I recommend people set a goal of being able to retire at 59 1/2 if they want to. At 59 1/2 you're able to draw on your retirement benefits without penalty, and I've known quite a few people that passed away in their mid-sixties. 59 1/2 allows you a little more time to enjoy life.

  • Review Your 401k Annually. Make sure you review your 401k/403b plan annually. Don't be afraid to sit down with the plan's advisor. He's collecting fees off the money you invest with him, so he should take time to meet with you. You are his client.

  • Invest in Funds That Perform. One of the main issues I've seen in 401k investments is that the money has been diversified into three to four different funds. On the surface, this is good advice, but many times spreading your money across multiple funds means that you pick 1-2 high performer and 1-2 lower performing funds. This can cost you hundreds of thousands of dollars over time. In any case, pick higher performing funds. Not all funds are created equally. Low cost index funds like an S&P Index fund are recommended by many financial advisors especially for investors who are not actively managing their investments and moving their money around.

  • Lower Your Fees. Review your fees, the lower the better. If you have a fund that sees growth of 10% per year, but your fund manager takes 1-2% for management fees, that means you're only left with 8-9% growth. Sadly, some fund fees go above 2% depending on what types of investments you make. Also, you need to realize that whether or not your fund grows, the fund advisor will still take their annual fees. So let's say your investment drops by -10% in one year, your fund manager will still charge you the management fee of 1-2%. Ouch! That hurts! In cases where the fund fees are high, you may want to look at your investment options outside your 401k. You'll need to crunch the numbers to gauge the value of your 401k and how it meets your long term financial goals.

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