Column: How to make the most of your 401(K)

<p>Teresa Brown</p>

How is your 401(k) fairing since the market downturn?

Many investors who continued to contribute and kept a mix of stocks and bonds in their portfolios have watched their nest eggs grow again. If you have not seen a significant rebound in your 401(k) balance, here are some steps you can take now to potentially increase your returns.

Employer matching contributions vary by plan, but a common match is 50 cents to every dollar contributed, up to a maximum of 6 percent of your pay. If your employer offers a match, make sure you contribute at least the full percentage to be matched. Otherwise, you’re essentially forfeiting “free money.”

Aim to save at least 10 percent of your salary annually (not including your employer match). The Internal Revenue Service rules allow you to contribute up to $17,500 this year; those 50 or older can make an additional catch-up contribution of $5,500 for a total of $23,000.

If saving 10 percent of your pay is not feasible this year, increase your contributions by 1 percent each year until you reach your goal. Remember, traditional 401(k) contributions reduce your tax liability, since they are drawn before taxes are withheld, and your savings grows tax-deferred, compounding more quickly than if it was taxed each year.

Your asset allocation should take into account your financial goals, years until retirement and risk tolerance. If you abandoned your original allocation during the market downturn, it may be time to rebalance the account. Reassess your investment alternatives carefully, and ensure your choices support your long-term financial goals. Schedule a review with your investment professional to help you evaluate the funds available in your plan.

As a rule of thumb, your employer’s company stock should not comprise more than 10 percent of your 401(k) portfolio or you may be exposing yourself to too much risk. If you own more than that, consider acting to bring your holdings under the 10 percent threshold.

Resist the urge to take a 401(K) loan. Even though you borrow from and pay interest back to yourself, there are hidden costs. When you make a loan, some of your investments are sold off, and, as long as your loan is outstanding, you miss out on any capital gains or income those investments would have earned.

If you leave the company while a loan is outstanding, you must be prepared to repay the entire balance quickly, or the amount owed will be considered a distribution, subject to income taxes and a 10 percent early withdrawal penalty if you are under age 59½.

Rebalancing brings your mix of investments back in line with your original asset allocation. Over time, one asset category will perform better than others, skewing the percentage invested in that asset category. For example, let’s say you determined that your portfolio should be allocated 60 percent in stocks, 25 percent in bonds and 15 percent in cash investments. If the stock market made significant gains over time, stocks could end up comprising 80 percent of your total portfolio, exposing you to a much higher level of risk.

To realign your asset allocation, you would need to sell off some of your stocks and invest the proceeds in bonds and cash until you achieve the original mix, or alter your contributions so more is invested in the under-weighted categories until the portfolio is rebalanced.

The act of rebalancing follows a fundamental investment principle -- to buy low (any investments that are under-performing) and sell high (those investments that are performing well). And most importantly, it forces you to stick with your long-term investment strategy.

As a rule of thumb, you should rebalance when your assets drift more than 5 percent away from their original allocation. This can occur naturally over time, or with a sharp rise or decline in one or more of the asset classes. Investors who don’t regularly monitor their funds may choose to rebalance once or twice a year as part of their annual or semi-annual portfolio review.


Teresa Brown is a Registered Representative of INVEST Financial Corporation, member FINRA/SIPC. INVEST and its affiliated insurance agencies offer securities, advisory services, and certain insurance products, and is not affiliated with TMB Financial. Teresa Brown can be reached at 503-861-9402.

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