How To Manage a 401(k) Plan

Part of the popularity that surrounds the 401(k) plan can be attributed to the flexible investment opportunity it provides.


Unlike the classic pension programs of the past, a 401(k) plan allows employees to have more control over their investments. This control translates to more responsibility over a retirement fund, and therefore more risk. While traditional pension plans guarantee a set annuity upon retirement, a 401(k) is subject to the investments in its portfolio.

Before you create a plan for managing your 401(k), you need to know how involved you want to be and how much control your type of plan offers you. Some plans oversee a small number of mutual funds, offering little flexibility, while others may grant you full access to choose individual stocks and even real estate. There are a few questions you should ask yourself before you begin: How much control does your plan allow you? How much investment knowledge do you have? Do you enjoy choosing investments or would you rather take a back seat? Due to the uncertain nature of investing, you should stay mindful of spreading your investments. Don’t rely too heavily on your 401(k) plan to secure your retirement.

Understanding Your Plan

The management of your 401(k) does not start and end with the investment portfolio. There are other features to this plan that require your attention throughout your employment. Your employer is required to give you a Summary Plan Description (SPD) when you enroll in a 401(k). The SPD carefully outlines the benefits of your plan, contribution limitations and participant responsibilities. Here are few features to a 401(k) that, if managed well, can yield positive results.

Matching Contributions

Most plans allow an employer to match an employee’s contributions. In some cases, this feature is only available after an employee has worked for a company for a set period of time. Some plans will offer this feature immediately. If your plan offers this feature you should contribute the maximum you can while your employer is offering this feature. It is important to note that the employer uses a percentage of your contributions to calculate how much they can match. Therefore, if you are contributing the maximum amount allowed per year, you will also be receiving the maximum amount your employer can contribute.

Monitor Statements

Review your account statements when you receive them. Whether you are deeply involved in your investments or not, monitoring your investments and their performance is an important part of managing your 401(k). After all, the success of these investments is directly related to the account balance you will withdraw when you retire. If you have some control over where you can invest, make sure you utilize this power and choose investments that you feel will perform better.

Understand Your Investments

Regardless of who manages your investments, you should have a clear grasp of some key features to investing. Re-balancing is a term often used in the investment market. The percentage of stocks, bonds and other investments in your portfolio may fluctuate as one investment performs better than another does. Some financial advisors recommend keeping these investments at a locked percentage. Keep this in mind as you monitor your 401(k) and aim to rebalance your investments to reflect these percentages. Researching common terms and procedures will keep you informed and confident when dealing with plan official or financial advisors.


Funds are a good way to keep your 401(k) investments working hard without needing to be too intimately involved. They can range from very broad mutual funds to funds you can manipulate yourself. Even if your plan offers a small selection of mutual funds to choose from, research the options and select the fund you feel confident about. There are two popular funds used by 401(k) participants.

  • Target date funds operate by requiring you to set a target year for your retirement. It uses this date to craft its investment over time. Typically, these funds begin with risky investments and end up with more conservative choices in preparation for your retirement.
  • Asset allocation funds are comprised of similar stocks and bonds as target date funds. However, in an asset allocation, you decide what percentage of each investment you would like to keep the fund focused on. Essentially, you are setting the risk level of the fund by stating how many bonds, stocks and other investments you want maintained at that percentage.

Financial Advisors Versus Self-Investing

Depending on what plan is available to you, you may have default investments already in place, or be given the opportunity to manage the entire fund by yourself. Deciding how to manage your fund relies heavily on these circumstances and your knowledge of the investment market.


Hiring a Financial Professional

Many financial planners and investment professionals manage 401(k) portfolios for employees. Fees for these services vary depending on the situation. If you do not possess a lot of investment knowledge, or do not wish to be intimately involved in your investments, then hiring a financial advisor would be a good choice. That being said, you should conduct thorough background checks on any professional you hire and ask colleagues or family members for recommendations. Certain financial advisors may require a minimum balance before taking on an account.

Self-Directed Plans

In certain cases, a 401(k) plan will allow a participant to seize full control over the investment funds. Participants can invest their money in individual stocks, bonds and certain types of real estate. There is a particular risk in choosing to manage your account this way. A sharp knowledge of the market is needed for a portfolio to operate successfully, as well as an understanding of asset allocation and trading fees. Some 401(k) plans come equipped with advisors and fund managers who can offer free advice and assistance to those looking to manage their investments in more detail.

There are rules and restrictions with these plans. Participants may not be able invest in certain items, such as life insurance or personal real estate projects. The employee assumes full responsibility over the fund, and in doing so, loses the right to sue the plan officials if his or her investments do not perform well.


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