5 Ways to Fix Your 401(k) With ETFs
February 10th, 2009 at 6:00am by Tom Lydon
Many investors have seen their 401(k)s take a beating in this recession, but among the many solutions out there that could fix this problem and bring us back to normal are exchange traded funds (ETFs).
Elainor Laise of The Wall Street Journal outlines the following five ways to help get things going again:
- Save, save, save. Undersaving has always been a major problem, but in these hard times it seems to be prevailing. Dwindling down some of your wants and desires to needs may enable you to save a few more pennies and get you over that bump. With ETFs, there are hundreds of options for where you can invest and save, too. No matter your goals, risk tolerance and investing style, there are several options for you. Find them.
- Utilizing company matches. This may be difficult because many employers are decreasing or even eliminating this policy. If this is the case, up your contribution to the maximum that the IRS will allow, $16,500 per individual for the current year and $22,000 for those of you 50 and older. Not only will this boost your nest egg, it will lower your contribution to Uncle Sam’s pocket.
- Don’t keep jumping from one fund to another. It might be tempting to dump a loser and jump onto the next best thing, but relying on emotion isn’t always the wisest decision. A possible solution to this is the use of target-date funds, like TDX Independence In-Target (TDX). Additionally, have a strategy to avoid letting your emotions get in the way.
- Pay attention to fees. This is the easiest area to improve. The majority of 401(k)s are focused on mutual funds, which generally charge have an expense ratio of around 1.02%. Contrast this with ETFs, which generally charge an expense ratio of 0.58%.; this can cut costs by almost half. Not only do ETFs offer the lowest expense ratio of all investment tools, they offer much more: transparency, easy diversification, lower risk.
- Encourage workers to save. Many companies don’t offer 401(k)s because of hefty costs and administrative issues and many workers that do have access to 401(k)s simply don’t utilize them. Perhaps the government can make it a bit easier for small business to offer 401(k)s.
If you haven’t already, it is time for all investors to blow the dust off of their 401(k) portfolios, look them over with a fine-tooth comb, consider all investment options, educate themselves about investment tools, especially ETFs, save a little more and get some advice from a reputable financial advisor. Let’s put the devastation of 2008 behind us and make every effort to maximize our portfolios.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.