8 Things to Look for in Your 401k

by Matt B

Two or three times per year, I like to take a close look at my 401k just to make sure everything is “running smoothly”. There are many ways most companies offer to change and adjust your 401k account (without fees) to make it exactly the way you want it. I recently reviewed my 401k account, and for once had to make no adjustments. Usually I have to change a thing or two, but with a YTD return of 22%, I did not have too many problems with my account. After a loss of over 30% last year, I am still playing catch-up, but this is definitely a step in the right direction.


This is not true of every account management company, but mine is diligent about sending plenty of literature that shows investments for different funds and performance. There is also a detailed outlook for the future of the fund. Now I’ll warn you, most of these booklets are extremely hard to understand and may confuse the hell out of you. That is okay. If these booklets are too much for you, do not overextend yourself. Find a nerdy pal who can break it down into baby talk for you. These numbers are actually pretty easy to understand if you know what you are looking at. Most of it is just investment amounts and performance within the fund.

Contribution Amount

After the long-winded literature that is fund specific, the contribution amount is next on my checklist. Personally, I contribute 10% of my gross income even though my company match (see below) is less. This will likely change when I start my IRA account, but for now, 10% is just right. When I started my 401k, my contribution was a mere 3%. After I realized that I did not miss that 3%, I slowly grew to 10% over a period of about 8 months. Chances are, you will not miss the money in your paycheck if you grow your contribution percentage slowly.


As I said in the intro, last year’s performance was awful. But I am not the only one who had some pretty big losses. Had my overall performance not been so poor last year, I would be more than happy with gains of 5-10%, but since 2008 was such a bad year for everyone, my current 22% return in 2009 is doing well in comparison with my expectations.

Asset Allocation

Asset allocation is one of the most important terms in investing. If you do not know, it is the equivalent of “don’t put all of your eggs in one basket”. Your investments within the funds in your plan should be pretty well diversified, but do not take their word for it. It is very easy to find out what sectors of the market each fund holds. Your brokerage may have an online platform that makes it even simpler. I could log on right now and find out exactly where all of the investments are in each of my funds.


Dividends are a very important factor in the growth of your 401k. Most account managers automatically re-invest dividends. This is a good thing. If you have the option to receive your dividends as a check or to be direct deposited into your account, avoid it. There is no rational reason to take these funds away from your retirement account. If you are hard-up for cash and you think the dividends will help you get a bit of extra cash, think again. If you really need the money, temporarily contribute less to the 401k instead of taking your dividends away, they will be worth far more in the future.

Company Stock

Keep little to nothing in company stock. I say, absolutely no more than 5% of your overall account. You may have the utmost confidence in your employer, but so did the employees of Enron and WorldCom, among other companies who dropped to zero. I’m not saying that your company is going to go under, but there is no great benefit I can see to hold a large portion of your retirement money in company stock. Furthermore, there are plenty of legal issues that sneak their heads into the mix when company stock is involved. You would be smart to just keep it to a minimum.

“Lifepath Plans”

Most large brokerages offer plans specific to your approximate retirement timeline. These are actively managed, just like every other fund in your portfolio, but they are adjusted for proximity to retirement. For example, if you have a “lifepath” plan for 2020, most of the investments in the plan should be more and more conservative the closer you get to retirement age to avoid big losses when the funds should become available.

Because I can keep an eye on the funds myself and adjust the investments within intelligently, these funds are not very appealing. That is not to say that these are bad funds, but I do believe that they are for people who can not manage their own accounts. If you read Financial Methods regularly, chances are you can manage your own 401k just fine.

Company Match

Most companies match a percentage of what you are willing to contribute. I recommend contributing AT LEAST the minimum that the company will match. It is free money!

Even though this year’s returns do not make up for what I lost last year, if you count the company match, I’m still ahead. My investments may have lost overall, but throw that “free” company money in the mix, and I’m still up! If you are managing your own retirement accounts, look into all of these variables and make adjustments when you have to. Hopefully, you will be thanking me in 25-50 years!

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newretirement.com September 1, 2009 at 3:02 pm

Good advice on not keeping money in company stock. You need to be sure to diversify your 401k as much as possible and be able to protect yourself if a company or industry go downhill.

Ashley September 1, 2009 at 3:58 pm

Good breakdown of 401k’s and the basic things people should look for. It can totally be overwhelming, but with your 8 points people have somewhere to start.

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