4 Tips to Enhance Your 401(k)

Your 401(k) or other employer sponsored plans are powerful tools available to build long-term wealth, but simply contributing isn’t enough. With a few smart strategies, you can help ensure a more secure retirement. Here are 4 practical tips to help you get the most out of your plan.

1. Max the Match Contribution, Build from There:

One of the simplest ways to enhance your 401(k) is by contributing as much as you reasonably can — starting now. At a minimum, try to contribute enough to capture your full employer match if one is offered — it’s free money that you don’t want leave on the table. From there, look for opportunities to increase your contribution over time, especially following raises or bonuses. Even small increases can make a big difference thanks to compounding growth. Set a goal to gradually work up to the annual IRS contribution limit. A good rule of thumb: treat your contribution increases like a built-in raise for your future self.

2. Diversify Your Investments:

A well-diversified portfolio spreads your investments across a variety of asset types to help manage risk and reduce volatility. Diversification can take several forms: across asset classes (such as stocks, bonds, and alternative investments), company size (large-cap, mid-cap, and small-cap stocks), investment styles (value, blend, and growth), and geographical regions (U.S. vs. international markets). Because different areas of the market perform differently over time, diversification can help smooth out returns and reduce the impact of any single underperforming investment. While it won’t guarantee higher returns, diversification is one of the most effective ways to manage risk over the long term.

3. Be Mindful of Fees

Investment fees, often hidden in mutual funds’ expense ratios, can significantly eat into returns over time. Investors should always compare the costs of investment options within their plan. Index funds tend to have lower fees because they simply track a benchmark, like the S&P 500. Conversely, actively managed funds typically charge higher fees in exchange for professional management and the potential to outperform a given benchmark. Actively managed funds should be evaluated critically to determine whether they consistently outperform comparable index funds over time, net of fees. Be mindful of fees, as they can significantly impact your returns.

4. Review and Rebalance Periodically

Your investment allocation can drift overtime due to market performance. Periodically review your holdings and rebalance if necessary to realign with your strategy. Many employer sponsored plans offer automatic rebalancing features which may be useful for an investor wanting a hands-off approach. Don’t just set it and forget it – review and rebalance to stay on track.