3 Opportunities Your 401(k) May Offer You

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3 Opportunities Your 401(k) May Offer You

Like many people, you might have a significant amount of your retirement savings in a workplace 401(k) plan. Many plans today offer extra features that can help you manage your contributions and investment strategy while potentially improving your long-term performance.

Here’s a look at three features to consider using if they are available in your plan:

1. Auto-increasing contributions

One easy way to boost your retirement savings is to raise your 401(k) contribution rates over time. For example, you may decide to increase your contribution when you get a pay raise or at the beginning of each calendar year.

Many 401(k) plans offer an “auto-increase” feature that allows you to preset how often and by how much you raise your contribution so you don’t have to do it manually. It essentially puts your contribution increases on autopilot. For example, you might raise your contribution rate by 1 percent every year until you reach your maximum contribution limit.

The automatic increases will stop once you reach your annual 401(k) contribution limit, so you don’t risk overstepping.

2. Auto-rebalancing

It’s a good idea to keep an asset allocation that’s tailored to your long-term goals and investment horizon. For example, one investor’s target allocation might be 40 percent in U.S. stocks, 30 percent in international stocks and 30 percent in bonds and other fixed-income securities—or it might be very different depending on personal risk tolerance and goals.

Whatever your allocation targets, you generally will want to rebalance your portfolio annually or whenever a position veers more than 5 percentage points off its target. This could improve your long-term investment performance by trimming back positions in your portfolio that have outperformed in recent months while adding to positions that have underperformed and may be positioned for stronger performance.

Many 401(k) plans now offer an “auto-rebalancing” feature that will reallocate the assets in your portfolio quarterly, annually or whenever your portfolio drifts too far from its targets. You probably have to opt in to this feature and it may allow you to choose how often or when you want to rebalance.

Some plans also offer funds, such as target-date retirement funds or managed accounts, that adhere to a specific preset asset allocation based on their investors’ risk tolerance. These funds generally rebalance automatically on a regular basis in order to maintain that asset allocation.

3. Roth Contributions

A growing number of employers have added a Roth option to their 401(k) plan. Unlike the traditional 401(k) contribution, Roth contributions are made on an after-tax—not pretax—basis, meaning you receive no upfront tax deduction. However, your Roth savings will grow tax-free and you will owe zero tax on the earnings or contributions when you make qualified withdrawals. (You can make qualified withdrawals starting at age 59½ or if you become disabled, assuming you’ve had the account at least five years.)

As with a traditional 401(k), you have to start taking required minimum distributions (RMDs) from a Roth 401(k) by age 70½. But you can roll the savings into a Roth IRA, which doesn’t require you to take distributions during your lifetime.

Another potential benefit: Anyone regardless of their income can contribute to a Roth 401(k), while Roth IRAs only allow people with income below certain levels to contribute. So you may want to consider contributing to a Roth account through your employersponsored plan if you’re ineligible to contribute to a Roth IRA.

Whether it makes sense to contribute to a traditional or Roth 401(k), however, depends on several factors, including your current and expected future tax rates and your long-term goals. Consult with your financial advisor before making the decision.

These three features can help you take better control of your 401(k) retirement savings while reducing the time you spend managing your account. An advisor with BOK Financial Advisors can help you review your 401(k) account and identify other strategies that may improve your long-term performance.


Prepared by WSJ Custom Studios

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The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. The content in this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice.

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