How To Grow Your 401k Faster In 3 Easy Steps!
Some of the links in this post are from our sponsors, though the reviews and opinions are our own. We value transparency as much as you do, so for additional information click AFFILIATE POLICY AND DISCLAIMER
If you’re putting money into a 401(k), you’re already ahead of the game in comparison to many Americans. A recent study by the Pew Charitable Trust found that 28% of employees who have access to a plan at work don’t contribute. So, if you have a 401(k) account at all, it might be tempting to pat yourself on the back and call it a day.
But do you have any idea what’s actually going on in there? Sure, you probably look at the balance every now and then, but did you know there are super simple changes that can help you grow your 401k even faster?
I’d be willing to bet most folks have a fuzzy picture of how their funds are allocated, how much they pay in fees or whether they’re even on track to cover our expenses when they retire. Most people only think about what to do with their plan when they first start contributing or when they’re changing jobs and need to figure out how to rollover a 401(k) to a new provider.
If so, this is the “How To” for you 🙂
In this post we’ll talk through easy steps you can take to:
- Ensure you’re not paying high fees that can cost you BIG in potential growth
- Make sure your asset allocations are in line with your risk tolerance
- Determine if all your eggs are in one basket when it comes diversity of your portfolio.
But that's not all! We’ll also show you how to use a service that does all of that analysis for free, in less than 5 minutes, called Blooom.
Ready? Let’s get started!
Step 1: Figure out how much you are paying in fees
When it comes to your 401k, fees matter.
While you may only be charged a few hundred dollars a year, it can add up BIG over the course of 30 years, taking into account the magic of compound interest. The good thing is, there are really only two types of fees. The first, an administration fee, is charged by the provider of your 401k . The second is charged by each individual fund in your portfolio. This article will focus on the second type since administrative fees are the harder to reduce without moving your portfolio which is not always an option.
So what can you do about those fees charged by your funds? You reduce them by selecting a lower expense fund which suits your needs, but first you need what the cost actually is. The good news is that it’s pretty easy to figure out by checking their expense ratios.
Finds the fees!
Let’s take a look at two different funds so you can compare costs:
- Vanguard Total World Stock Index Fund Institutional Shares (VTWIX)
- Northern Small Cap Value Fund (NOSGX)
First, search for VTWIX and you’ll find an article by Morningstar which has a ton of detail.
Once that opens, you’ll see a little dashboard with a bunch of information, including “Expenses”, which lists “.09%” as your expense ratio.
But you want to find out how much it’s actually costing you a year, so multiply that % by the amount of money you have in the fund itself (not the whole portfolio) and that will tell you the annual amount you pay.
For easy math, let’s say you have $100,000 worth of VTWIX. That would mean you are paying $90 a year in fees. For comparison, NOSGX has an expense ratio of 1%, so the same amount would cost you $1000 a year.
That’s over a $900 annual difference between the two funds. This doesn’t mean one is better than the other, but it does mean you are charged 10x in fees.
Starting to see how this can add up?
Step 2: Determine what’s the right mix of assets for you
Now that you know how to figure out what the different funds are costing us a year, you should determine the right asset allocation, i.e. the mix of stocks and bonds in your portfolio. The quick thing to know about stocks and bonds is that stocks tend to have higher returns with higher risk, and bonds have lower returns with lower risk. This is not an absolute definition, but a fair generalization.
Many 401k’s provide something called a “target date fund” which changes your allocations to be less risky the closer your get to your target retirement date. Something to check out if you are looking to set it and forget it.
If you want to be a bit more active, you can try something called the “110 rule” where you subtract your age, e.g. 36, from 110, and the result, 74, is used to determine your allocation of stocks. So a 36 year old using the 110 rule would set an allocation of 74% stock and 26% bonds.
Step 3: Identify what options you have for diversifications, and rebalance your portfolio
At this point you know how much your paying in fees, and what a reasonable asset allocation should be. Now you need to diversify your investments across multiple funds so that you if one is impacted by a market shift, they others may not be . In my case I spread 74% of my money across several different stock-based funds that cover large-cap, small-cap and international interests, and I invest the 26% in different bond funds.
The actual funds available to you is driven by what your 401k offers. Always keep in mind that personal finance is personal, and my tolerance for risk is different than yours, so don't do something if you don't feel comfortable. Also, make sure you are analyzing each funds expense ratios to identify fees, and then select the right mix for you based on your target asset allocation and diversification strategy,
Or if you want to take a shortcut, you can hit the button below and get a free analysis done for you by Blooom who will do a lot of the heavy lifting for you.
What is Blooom?
Blooom is a robo-advisor that helps you get the most out of your workplace retirement account by minimizing hidden fees and optimizing your fund’s diversification and risk levels. They provide services for 401(k), 403(b), 457, 401(a) and TSP accounts--but for the purposes of this article I’ll just refer to 401(k)s to keep it simple.
Blooom offers two levels of service, and there are no minimum account balances to take advantage of either. First is an easy-to-use, free 401(k) analysis tool that provides a snapshot of your retirement account across three criteria: Fees, Risk, and Diversification. They also offer professional account management and monitoring services for $10 per month. Let’s take a closer look at both, to see if they’re right for you.
Get started with Blooom’s free 401(k) analysis tool
Signing up for Blooom’s free 401(k) assessment is quick and painless. To get started, just fill in your first name, birth date, and target retirement age. They will also ask for your email address and a password in order to set up your account.
Next, select your workplace retirement plan provider. Quick links are provided for the most common providers, but you can use their search box if you don’t see yours listed.
Finally, they’ll need access to your account to perform their analysis. You’ll need to provide your login credentials, so some folks find this part scary. You can always check out Blooom’s security standards if you’re worried. And remember, at this point you aren’t giving them access to make any changes to your account (you’d need to subscribe to their paid service for that…).
Now just sit back and relax for a bit! You won’t have to wait long—my assessment was ready in about 30 seconds.
How’s your daisy doing?
When you get your report, the first thing you’ll notice is that the health of your 401(k) is visually represented by a flower. As you can see below, mine was a daisy with some gnarly looking Venus flytraps and thorns growing out of it. Still alive and relatively healthy—but definitely in need of some love!
The analysis focuses on three aspects of your account (Fees, Risk, and Diversification), and you’re given a simple thumbs up or thumbs down to show how you’re doing in each area. Just click “Next” to get more in-depth information about their assessments.
Here’s what they had to say about the risk level in my 401(k):
All in all, I’d say their analysis provides just the right level of detail for the average person. It’s not a bunch of charts and spreadsheets that will leave you feeling overwhelmed—but it’s definitely enough information to highlight your plan’s weak areas.
You’ll still need to do your own research to make the right adjustments to your portfolio, but at least this analysis will give you an idea of where to start.
Consider Blooom’s 401(k) management service
Not a do-it-yourselfer when it comes to financial management? Get antsy every time the market takes a swing? Blooom’s 401(k) management and monitoring service might be right for you.
Once you sign up, Blooom will monitor your account on an ongoing basis and automatically adjust your 401(k) to
Minimize hidden fees
Diversify your portfolio across asset types
Rebalance your stock-to-bond ratio to maintain an appropriate risk level as you near retirement
Address any suspicious account activity
Basically, they will apply the analysis you received in your free assessment and do the legwork to make changes as necessary.
This premium service is $10 a month, regardless of the size of your account. Whether that seems reasonable or not will probably depend on how much you have in your 401(k) to begin with.
Filling a niche
It hasn’t always been so easy for the average person to get professional financial advice. Minimum account requirements and management fees have traditionally meant that many consumers get little guidance when it comes to how to invest their money.
As a result, most people wait until it’s time to rollover a 401(k) before reviewing their selections. And that’s not great, because even if you made good decisions in the beginning, the funds your plan offers can change…and your investment strategy should change, too, as you get closer to retirement.
Many fund providers do offer tools and recommendations to help consumers make smart choices about how they allocate funds within their 401(k). And for those of us who have an interest (and the time) to do a little research, they can be quite useful. But in my experience, they aren’t always user-friendly and the information they provide can be overwhelming. Charts and graphs aren’t for everyone.
Robo-advisors like Blooom make professional financial advice more accessible by reducing or eliminating minimum balance requirements and fees. Their tools and services are designed to be easy to follow, allowing users of all kinds to make smarter, better-informed decisions about their retirement savings.
Life can get busy. With work, family, and day-to-day finances to juggle, it’s no wonder so many of us ignore our 401(k)s. But you want to make sure your money is working for you, or else you’ll run the risk of not being able to cover your expenses during retirement. Blooom promises the best of both worlds: a well-managed retirement account little-to-no work on your part.
Free 401(k) analysis
I can’t think of any reason not to give this a whirl. I mean, it’s quick and free, right? If your daisy is in perfect health—great, you get to feel like a financial rockstar. And if it’s a bit wilted, you’ll at least have some recommendations on how to fix it.
401(k) account management
Whether or not this is a good product for you really depends on your financial management style. If you like to be hands-on with your investments, you might not see much benefit (and it might drive you bonkers knowing you’re not in the driver’s seat). On the other hand, if you’re the “set it and forget it” type, this would guarantee that your 401(k) is getting regular attention.
While I do love a simple pricing plan, $10 a month might be a bit steep for those with smaller 401(k) balances. Let’s say your balance is currently $5,000; that’s equivalent to a 2.4% annual management fee. That’s significantly higher than you’ll see from other robo-advisors (for example, Betterment charges 0.25%). Of course, as your balance climbs, the fee becomes more in line with what others are charging.
Blooom’s website says that their goal is to “to bring simplified financial services to neglected savers." All in all, I’d say they achieved that goal with these offerings.
So now that you have the right knowledge and tools to grow your 401k, what’s stopping you? Have you tried Blooom? Are there us other services you’d recommend?
Tell us what you thoughts below!