The hosts and guests of the podcast Friends Talk Money podcast give tips on retirement planning.

With the employer-sponsored 401(k) plan, you can conveniently save for retirement while working (if such an offer comes your way) and supplement the Social Security benefits you will enjoy during retirement. 

However, it can be excruciatingly tough investing and managing a 401(k) plan wisely.

These are just some of the questions you could scratch your head about: Which 401(k) funds to choose? How many? When is it wise to get out of some 401(k) funds and switch into others? Is it reasonable to make a withdrawal from your 401(k) or take a loan against your plan while working? When you’re almost retiring, should you convert your 401(k) investment to an IRA?

I have some answers, courtesy of the latest podcast “Friends Talk Money,” which I recorded with my co-presenters, Terry Savage and Pam Krueger. We interviewed 401(k) experts Edward Gottfried, Product Director at Betterment for Business, Brandon Jansma, a financial planner at Prudential Advisors in Irvine, California, and shared some of our own views.  

(Consider listening to the podcast wherever you can find it or at the end of today’s post.)

How to Manage Your 401(k) as You Work

When I asked Gottfried for his best advice on how to handle a 401(k) while you work, his first tip was: Check the fees for your 401(k) selections. The less money for investment fees is withdrawn from your account, the more you’ll have in retirement.

The person who opted for more costly funds, Krueger said, “would have to postpone their retirement by about four years just to supplement those fees.”

Krueger, who is the co-host of MoneyTrack on public TV and owner of (screening financial advisors), quoted this example from the Center for American Progress (CAP), which Gottfried puts in a nutshell:

Let’s assume you were to invest your 401(k) in a diversified stock index fund (which corresponds to returns of the market), with low fees — called expense ratios — of about 1/4 of 1% per year for 40 years when you retire. You would be getting about $100,000 more than someone who buys costlier mutual funds with an average expense ratio of about 1.3%.

The person who opted for more costly funds, Krueger said, “would have to postpone their retirement by about four years just to supplement those fees.”

The fees, or expense ratios, of index funds are generally lower than those of funds with a single person charged with managing the investments and buying and selling them on behalf of the 401(k) participants.

Tips to Keep the 401(k) Fees Low

Gottfried noted that there are usually a few different ways to earn 401(k) fees from the money you allocate. “The one over which you have the highest direct control is the fee connected with each investment vehicle,” he said.

But the other fees that need to be kept in mind are paid to the 401(k) provider by you or your employer. “Sometimes, these are flat-rate fees that are billed to you monthly. Sometimes, they’re annual fees. Sometimes they’re assets-under-management fees,” Gottfried explained.

If these fees amount to more than half the percentage of your credit balance or surpass $7 or $8 per month for a flat fee in dollars, Gottfried advised you to discuss this with your employer. “Your employer has a responsibility to ensure that those fees are realistic,” he added.

Savage, the author of The Savage Truth on Money and a nationally syndicated personal finance columnist, noted staff of small businesses typically pay higher 401(k) fees. 

She said, according to The 401(k) Book of Averages, a company that has 2,000 employees has an average expense ratio of 0.7%. In contrast, a small business plan with 50 employees has a 1.14% expense ratio on average.


A Few Words about 401(k) Investment Risk

When it comes to investment risk and your 401(k), Gottfried said, the further away from retirement you are, the more risks you can afford. In other words, the younger you are, the greater the percentage of your 401(k) you can hold in stocks and the lower the percentage in bonds. As you get older, you can decrease the rate of your stocks and increase your bond holdings.

We also discussed the two popular ways of investing in a 401(k) fund: a risk-based fund and a target-date fund.

With a target-date fund, you select the year in which you’re likely to retire. The fund invests accordingly in stocks and bonds, whereby it usually increases the propensity for bonds the closer you get to retirement. This type of investment is sometimes referred to as “set it and forget it” because the fund manager will automatically redistribute your holdings for you.

Gottfried called target-date funds “a kind of preferred way to invest in a 401(k).” Many employers use this as a standard investment option for employees unless the staff selects an alternative.

For a risk-based fund, says Jansma, you fill out a questionnaire on the website of the plan sponsor and receive a score that describes your risk tolerance as “moderate” or “aggressive.”

Then, according to Jansma, “choose the fund that best suits your risk tolerance. Your risk remains the same throughout the time horizon in which you invest. It’ll always be moderate, or it’ll always be aggressive.”

Target-Date Funds: Advantages and Disadvantages

I mentioned that I’m a fan of target-date funds in the podcast. But Savage and Krueger weren’t so keen on them.

“Well, here’s the hitch with ‘set it and forget it,'” explained Krueger. “Management fees in target-date funds are generally higher than in index funds.” Therefore, she said you have to decide whether those additional fees are worth it.

Here‘s the issue Savage is concerned about: No two target-date funds with the same target year are invested similarly. So, at any given point in time, your fund could be much more heavily invested in stocks or a lot more lighter in stocks than another fund manager’s target-date fund.

“So, you have to rely on someone else to tell you what the correct ratio of equities is,” said Savage. She advises that “you have to look into the target-date fund. Don’t blindly depend on it.”

What You Should Know about Early Withdrawals, Loans & Rollovers

How about taking out money from your 401(k) before retirement because you’re in need of the cash like some people in the pandemic period? With the new CARES Act, some consequences for early withdrawals of 401(k)s with a limit of $100,000 on the amount you can withdraw with impunity have lessened.

According to a survey by the Commonwealth Fund, 16% of participants to 401 (k) low-middle-income plans who didn’t put away funds for emergencies have taken or plan to take a 401(k) loan or withdrawal.

Gottfried recommends this: “Be very careful as to whether you have to dive into the reserves meant for your retirement; If you feel you have no choice, he added, take the smallest possible amount, in small steps.”

Savage reminded the audience that early withdrawal means giving up future tax-deferred growth of the money had it been left in 401(k).

Whenever you’re set for retirement and have to decide if you want to keep your 401(k) money where it’s, in your plan, or whether to transfer it to an IRA, compare the fees you’re currently paying with the one you’d pay for the IRA.

In addition to this, Savage explained that you should look at the investment opportunities you’d get in an IRA rollover. She added that there will typically be more choices than your 401 (k). Some of them “might be better suited for your retirement asset allocation,” she noted.


With Gratitude and Love
Dewvy ❤️