In 1974, Congress enacted legislation known as ERISA (Employee Retirement Income Security Act).  This ushered in a new era of financial self-reliance for millions of American workers.  With this transition from defined benefit plans (i.e., pensions) to defined contribution plans such as IRAs and 401(k) plans, the United States government conveyed their expectation that employees must now privately manage their financial futures.

Moreover, as the sustainability of government-sponsored entitlement programs are called into question, more and more citizens are realizing the importance of taking a proactive approach toward their “golden years”.

To be honest, as an independent investor, I’m not the biggest fan of traditional retirement accounts – I can earn much better returns by managing my own portfolio, in contrast to turning over my money to some mutual fund.

Nevertheless, retirement accounts do serve a purpose and can provide a nice safety cushion for the road ahead.  So in this blog post, I’ve outlined four fundamental criteria for properly evaluating a traditional retirement account such as a 401(k) plan.


Evaluate the diversification of your retirement account.

Properly diversify your retirement accountIt’s been said many different ways: “Don’t put all your eggs in one basket”, “Don’t put all your irons in one fire”.  This investing principle is logical, prudent, and profitable.  Unless you’re an extremely active manager of your personal finances, then it behooves you to allocate capital across non-correlated asset classes.  Even if the investment selection available in your retirement account is limited, you commonly have choices that include target date funds, real estate funds, bond funds, growth funds, international funds, and cash holdings.  Be sure you’re not too heavily weighted in any particular one of these areas.

In your earlier years, your retirement account can handle more risk because you have time to ride out a tumultuous market.  However, as you age, you’ll want to transition your portfolio out of holdings that are more aggressive, and into stable, preservation, and income-oriented positions.


Evaluate the mutual fund expense ratios within your retirement account.

Written into the fine print of a mutual fund prospectus is the fee structure that the fund managers are charging you for overseeing your account and participating in their basket of holdings.  Prior to investing in any fund, always check the expense ratio.  It’s typically a percentage such as 0.75% or 1.30%.  The higher the percentage, the more the fund is charging you.  While 1-2% may seem insignificant, as your retirement account grows in value, those few basis points can quickly add up to thousands of dollars.

If you’re opposed to the idea of high expense ratios, consider adding Exchange Traded Funds to your retirement account.  These funds typically offer holdings similar to those of mutual funds, but employ a passive management strategy to reduce operating costs.  This results in expense ratios that are often less than 0.50%.


Evaluate the contribution rate you’ve elected for your retirement account.

What’s the percentage of your pre-tax income that you’re contributing to your retirement account?  Your contribution rate is a strong indicator of the future size of your retirement account.  Many financial planners recommend increasing the amount to whatever you can comfortably afford.  Ten percent (10%) is a good benchmark to shoot for.   After all, your pre-tax contributions reduce your tax exposure and help to secure your financial future.

On a related note, many benevolent employers match a percentage of your contribution to company-sponsored retirement accounts.  This translates to FREE money being funneled into your portfolio.  Check with your employer’s Human Resources Department to see if this benefit is available.        


Evaluate the re-balancing of holdings within your retirement account.

As positions within your retirement account fluctuate in value, it’s recommended that you review and re-balance your holdings at least once a year.

For example, if your account started out equally allocated between a handful of mutual funds and one of them has recently spiked in value, you may want to consider lightening the position to avoid being too heavily weighted in a particular sector.  If many investors had applied this simple principle prior to the collapse of the technology market (2000-2001) and real estate market (2008-2009), their retirement accounts may have performed much more favorably.  Remember to review and adjust accordingly.

In closing, while I’m not a huge fan of traditional retirement accounts, they definitely serve a purpose and help to provide a dignified lifestyle to Americans as they transition out of their working years.  Next time you sit down with your financial planner, bring up the topics covered in this blog post.  These are some good discussion points to help ensure your retirement account is on track to meet your expectations.

Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.


Gerald Larue thumbnail pictureThis post is by Gerald Larue, the founder of DEMOS Financial, an investment training, education, and financial research company. DEMOS Financial is a California limited liability company that specializes in helping novice and intermediate investors with strategies, approaches, and techniques for generating investment income and putting their money to work for them. The Pay Me Plan home study course was created and produced by DEMOS Financial.

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