I have stayed with same company for past 17 years but later this month I will be starting a new job with a different company. As you can imagine, I have several concerns and one of the concerns deals with 401(k) retirement plan. There are three primary decisions I need to make related to my 401k retirement plan.
1. My Contributions to New 401k Retirement Plan
This decision is fairly simple for me. What I am going to do is contribute the same percentage as what I have been doing previously. For those whose salary changes (increase or decrease) with a new job, you should consider adjusting the percentage. Whether your salary is higher or lower, what you should focus on is adjusting contribution to 401K retirement plan to maximize the annual contribution limit, currently set at $18,000 in 2016 for ages below 50. The catch-up contribution limit, for those who are 50 or over, is set to $6,000. In my case, although I will now be working for a different company, my salary will stay the same so I’ve decided to maintain my current contribution percentage.
2. My Investment Elections for a New 401k Retirement Plan
As you can expect, the list of available funds to choose from is different from my prior employer. So, I had to do some research on which funds to elect for my new 401K retirement plan. One of the funds is Dodge & Cox Funds, which invests about 25% in Financials and another 24% in IT. This portfolio has done quite well in the last 5 years with average annual total return of 10.14% and only 0.52% expense ratio. In fact, I even saw this fund as one of the top large-cap mutual funds in Money magazine. I’ve decided to allocate 25% of my 401k contribution to Dodge & Cox Funds.
Remaining 75% has been diversified in the following list of funds:
- T.RowePrice Institutional Mid-Cap Equity Growth Fund (20%)
- Vanguard PRIMECAP Fund (20%)
- Vanguard Institutional Index Fund (25%)
- Wellington Small Cap 2000 (10%)
In choosing the right funds for my 401k retirement plan, I was sensitive to choose a relatively low fee (below 1%) with a strong historical past performance covering span of 5 and 10 years. I purposely left out international funds and went with 100% Domestic because I feel Domestic will continue to outperform International in the future. Also, because I am in my early 40’s, I’ve decided that I can continue to be aggressive, which allowed me not to invest in bonds.
3. Dealing with Multiple 401k Retirement Accounts
The hardest decision I had to make was regarding what I should do with my first 401k retirement account from my prior employer. I could leave it alone and manage the account separately; I could transfer the balance over to my new 401k retirement account with new employer; or I could transfer the balance to a new IRA account with a broker. I was able to save slightly more than $400,000 for past 17 years in my first 401K so it wasn’t an easy decision. Honestly, I am still debating what I should do but for now I’ve decided to leave the balance alone in my current 401k account because I realized there is some advantage in leaving it in there. It provides more investment flexibility in my prior employer 401k retirement plan such as more funds to choose from, common company stock as an investment option, and even online brokerage trading option from Ameritrade.
Personal Lessons Learned
One thing I’ve learned from my personal experience in managing 401K retirement plan is that you should try to be more aggressive rather than trying to find ways not to lose your principal. This doesn’t mean just picking any aggressive funds. You must do your own research in picking the right funds. I tried to have some balance between Large-Cap vs Mid-Cap vs Small-Cap. Even incorporate international funds, although international funds that were available in my prior employer all suffered compared to Domestic funds. A simple approach you can take is 25% allocation in the 4 areas for diversification.