Matthew D. Hutcheson -- a driving force in the independent fiduciary movement and co-founder of e-Luminary.com, a web site that vets advisers for consumers – has four tips to navigating the 401(K) maze:
Know your expectations
Before you even buy your first fund or stock, talk to your adviser or plan manager to find out what the reasonable return would be on your portfolio given your investment time frame. Too often, we trust our advisers to build a portfolio that will grow. Or we feel that we have limited options offered by our company's plan. Take charge of your 401(k) by pushing the adviser -- whether he is an independent broker or the person designated by the employer to work with employees -- to give a reasonable estimate of what income you can expect after a certain number of investment years.
"True investors know what to expect," Hutcheson told WalletPop. "Somebody has to articulate what that participant can reasonably expect on that investment time horizon. If they can't answer it, it's a big red flag."
One of the first things an adviser wants to know is how much risk you can tolerate. But that's the wrong approach, said Hutcheson. Instead, they should explain to you the risk involved with that investment or portfolio given your retirement income expectations.
"The words should be 'risk comprehension,'" said Hutcheson. "What kind of expected return on capital can I get for the level of risk? What is the level of risk? You want to comprehend the level of risk in order to build your retirement fund." You need to know that you have enough money to fall back on when it's time to stop working.
Change isn't always good
Another red flag, said Hutcheson, is the frequency in which managers or advisers change out funds. In any case of buying and selling, you'll incur expenses, from the broker's commission to the price difference between the investment you're selling and the one you're buying.
Hutcheson finds it odd that when a fund doesn't perform as expected, the first reaction within the 401(k) community is to remove the fund. But one of the basic tenets of investing is to buy when the price drops and to sell when the price goes up. "This is an economically inappropriate norm," he said. "Funds are replaced when plummeting and it's the opposite of generally accepted investment principles."
Keep an eye on things
Check at least once a year to make sure your investments are meeting your reasonable expectations. It's nice to think that once you've picked the funds, it'll take care of itself. But funds do change, as do your expectations.