Setting Up and Managing Your 401(k)

by Charles Rotblut, CFA

Setting Up And Managing Your 401(k) Splash image

Choosing mutual funds from within a 401(k) retirement plan, or similar defined-contribution plan, can be both daunting and frustrating. Depending on your employer’s plan, you may have a large number of funds to choose from or a limited amount. If the funds are primarily institutional funds, they can be difficult to research. That’s not to mention that you will be handed a large folder or directed to a website to find answers to many of the questions you might have.

Potentially adding to the confusion is the growth of default options. Many employers now enroll workers with a pre-specified contribution amount and pre-select a fund choice (typically a target date fund). The goal is to get employees enrolled and saving. Though effective for getting workers to set money aside for retirement, it may not be the best option for you.

Fortunately, there are some basic guidelines and strategies you can follow to take control of your 401(k) plan. You will still need to read through the plan documents and navigate through the plan’s website, but with a little bit of effort, you can better position yourself to achieve your financial goals.

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Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at


Donald Rome from California posted about 1 year ago:

You wrote. "If you are age 55 or older, you can also contribute an additional $5,500 as a catch-up contribution".
While the catch up contribution amount is correct, in 2012, I believe the age should be 50 or older.

Charles Rotblut from Illinois posted about 1 year ago:


You are correct. That was an error on my part. The article is being changed accordingly.


John Goodell from Maryland posted about 1 year ago:

Somewhere in between for older investore (>65) may be ETFs picked from the AAII list.

Vern Andrews from California posted about 1 year ago:

Your article is based on mutual fund managers selecting securities and you selecting 6 or more mutual funds for a deversified Portfolio. Obviously growth is less and risk is low, which is ideal and safe. However due to the fact that people are living longer and need more savings to insure your lifetime financial support than previously. Suggest if you are a real individual security selector or self manager for your personal Retirement Portfolio there may be other methods to use. A method I have used (sample of one) during the Distribution Phase of an Investment Portfolio is a real time Flexible Mix Strategy with special potenial Portfolio alerts that will provide a mechanism to re-allocate your Portfolio that is sensitive to the investing environment rather than once a year. During the 11th recession since WWII and the credit crunch when the S/P 500 Index declined by over 50 percent, my Portfolio only lost negative 8.73% and during the post slow recovery period the Distribution Phase Portfolio increased by a better growth percentage than the Index. I believe that this strategy will also work well during the Investment Phase of a Retirement Portfolio.

Jerry Mead from Illinois posted about 1 year ago:

I basically agree with the allocation scheme but worry about investing so much in bonds. I expect interest rates to rise at some point in the future which should cause the value of the bonds held to decline. When and how fast this will occur is the risk to a bond investment of the allocation model.

Aaii Kasturi from New Jersey posted about 1 year ago:

I wish all 401Ks would provide access to a Treasury Direct account inside the 401K and permit participants who want it to use it. Some people would just like the simplicity of this to preserve capital and avoid all fees

Alessandro Martelli from California posted about 1 year ago:

@Jerry, I agree that today the main risk in bonds is duration risk (AKA interest-rate risk) -- last weekend's Barron's has an interview with the UBS Wealth Management top managers pointing out this means convincing investors to switch from Treasuries and investment-grade corporates to well-selected junk (HYLD is a jewel there -- DON'T go for index funds in bonds, very differently from ones in stocks they make no sense... where's the sense in wanting to lend more to companies which are more indebted?! -- HYLD also carefully avoids "covenant-lite" and even-worse PIK junk bonds and for my money is THE way to get exposure to junk) -- also emerging market bonds and floating rate secured senior bank loans (the latter best done through CEF, closed-ended funds).

In addition to VWIAX (2/3 in investment grade corporates, 1/3 in dividend-paying large caps -- unusual for Vanguard in being actively managed, but with a 0.18% expense ratio that's pretty Vanguardy anyway;-) I find I have no trouble meeting my target 25% allocation to fixed income (oh, I own a few individually selected preferred stocks as part of that allocation, too -- technically equity but pretty much fixed income in real life;-).

Ben Graham taught us to aim for 50/50 bond/stock split in normal markets, each slice variable between 25/75 in extreme cases (and, we are pretty extreme these days - as Graham was circa 1946), but never, ever beyond that -- age NOT a consideration. I'm sure today's advisors think they're smarter than Graham, but I have my doubts in the matter;-)... [FWIW, recent Montecarlo simulations showed he was right and 50-50 (actually most anywhere around 40-60 to 60-40), with rebalancing, was pretty much optimal all the time if one can't call bond or stock bubbles].

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