When it comes to retirement savings, does your 401(k) plan include exchange traded funds (ETFs)? If not, that could be one mistake out of the five that we’ve found are commonly made by investors.
We’re only human, and we make mistakes. But try to avoid the costlier ones, such as speeding tickets or ignoring your 401(k) plan. Redeeming Riches lists four costly 401(k) related mistakes and how to avoid them, and we threw in one of our own, as well:
- Bad methods for choosing funds: Picking funds based upon last years’ performance is a huge no-no, especially since the markets change daily. Imagine what a whole year does. Don’t base your investments on what someone else is investing in or add risk to your portfolio without being diversified.
- Not diversifying: By putting all of your eggs into one basket, you are getting the ups of all areas of the market. Asset allocation strategies are important and should be created before going into the market. The ETF Trend Following Playbook can help with some of the necessary homework when working on diversification and strategy.
- Unknown risk tolerance: Everyone wants big returns without any risk, but this seldom happens. You need to understand your risk profile and how that impacts your decision-making with your 401(k) funds.
- Knowing your company match: If you don’t know what kind of match the company is offering, you could be leaving free money on the table. At the very least, you should be putting enough into your 401(k) to take full advantage of any money they are going to give you.
- Not using ETFs: ETFs are touted for their efficiency, their ability to target different areas of the market, liquidity and lower fees. They can be a great addition to any 401(k) plan.
These days, there are a number of plans that incorporate ETFs:
- Darwin Abrahamson, the CEO of Invest n’ Retire, has been doing this for years. His proprietary system helped stick a fork on the notion that ETFs and 401(k)s were like oil and water.
- iShares has the iShares 401(k) Program, which was designed to assist financial advisors who want to have ETFs as standard options in their 401(k) plans. The program identifies administrative providers and networks that offer competitively-priced access to ETFs.
- ING Direct’s ShareBuilder 401(k) program is targeted toward small businesses with 1-50 employees. The plan has been around since November 2005, but ING took it over in November 2007. ING’s plan comes with a lineup of 16 funds, which might seem small, but the idea is to keep it simple. Offering more than that, they feel, simply becomes confusing for investors.
- The owner of Lafayette Copier Sales & Service Inc. in Lafayette, IN, had been using a 401(k) plan that only offered mutual funds. But earlier this year, the plan’s service provider worked out a system that allows participants to create their own portfolios and freely transact any iShares ETF on the market.
For more stories about retirement, visit our retirement category.