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| Making the Most of Your DC Plan |
| Defined contribution plans offer some great benefits. Here are some things you can do to get the most out of your plan. |
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| Don’t be too timid—think long term. |
| Studies have shown that most DC investors are too conservative with their retirement assets, putting too much in cash equivalents such as money-market funds or stable value funds. These instruments provide the smoothest ride but aren’t likely to give you the kind of growth you’ll need to beat inflation and make your money last through your retirement. Stocks, on the other hand, are likely to give you the bumpiest ride, but they’re also likely to score the biggest gains over time. Bonds are somewhere in the middle. It’s important to find an investment mix that is conservative enough for your stomach, but aggressive enough to give you a good shot at the type of retirement you’re aiming for. The more you can learn about the different types of investments and their potential risks and rewards, the better off you’ll be. |
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| Don’t go overboard on company stock. |
| Many employers will include company stock as an investment option in their defined contribution plan. While you may work for a terrific company, investing heavily in your employer is a risky proposition. Your job is already linked to the business prospects of your employer; linking the value of your investments to the financial health of your company is like doubling the stakes of your bet. Worst-case scenario: Your company hits hard times, you’re “downsized,” and your retirement assets plummet as the firm’s stock is hammered. If your company, like some, invests its matching contribution in company stock, try to balance out the risk when choosing your other investments. |
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| Resist the temptation to borrow from the plan. |
| Most employer savings plans allow you to borrow money if you need to. You then repay the principal and interest back into your account. This may sound like a great deal, but there are several drawbacks. For one thing, you’ll have less of your money working for you. For another, there are tax disadvantages because you’ll be repaying yourself with aftertax dollars that will be taxed again when you begin withdrawing money from your account—that is, you’ll be taxed twice. So view a loan from your DC plan as a last resort after other options have been exhausted. |
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| If you change jobs, don’t cash out. |
| If you’re under the age of 59, you’ll pay penalties plus the taxes that were deferred when the money was invested in the plan. Either leave the assets in the plan or roll them over to an IRA or your new employer’s plan. |
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| Tips for Employee-Funded DC plans |
| If your DC plan requires employee contributions (401(k)s, for example), there’s more you can do to maximize the benefits of your retirement investing. |
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| Don’t wait—start as early as you can. |
| There may be a waiting period before you’re allowed to start contributing to your employer’s plan, but sign up as soon as you can. The sooner you begin investing, the sooner your money can start growing, and the sooner you’ll be able to start earning returns on your returns. You’d be amazed at how much a couple of extra years can add to your bottom line. If your company offers to match your contributions, your early start will be rewarded by an ever greater margin! |
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| Invest as much as you can afford and grab the match. |
| Remember, because the dollars you invest are pretax, maxing out on your plan doesn’t take that big of a bite from your take-home pay. At the very least, you should try to contribute as much as your employer will match. For example, if your employer kicks in an additional contribution on the first 5% of your salary, be sure to invest at least that much in the plan. If you don’t, you’re basically turning down free money. |
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| While there are many other details that can further build your investing knowledge and help you succeed, following these basic guidelines should put you on the right track with your retirement savings plan. Good luck! |
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