Some companies have auto-deduction retirement plans. This means an employee must opt out of contributions or a minimum contribution (usually a percentage of gross salary) is deposited in a retirement account on behalf of the employee. Employees, especially those with their first full-time position, are confused when they start receiving statements from a mutual fund company that administers the plan for the employee’s company. These statements should be opened and studied on a regular basis, such as quarterly.
Often the administrator of the plan (which could be Cigna, Mutual of Omaha, Vanguard, etc.) takes that automatic contribution and places it in a fund that may not be relevant to the employee’s investment goals. For example, a twenty year old with a high tolerance of investment risk may wish to invest in a fund that includes emerging markets or small cap stocks. Or, an employee may be risk adverse and find him or herself in a high risk fund rather than a more conservative market index or bond fund.
Following is a short guideline for an employee who needs some basic information on reading a statement, finding out what type of fund he or she is invested in, and discovering his or her risk tolerance.
Reading a 401K Retirement Fund Statement
First, every statement should contain a section that states how much was contributed this period (usually a three month quarter), how much total has been contributed, and a gain/loss breakdown for the period (quarter). Also, the statement should explain what fund the money was deposited in. These fund names, like Small Cap Growth Fund or S&P Market Index Fund, will be followed by the fund’s symbol (Vanguard’s Balanced Index’s symbol is VBINX). Enter the funds symbol in Google Finance to receive a description of the fund.
Finding an Investor's Risk Tolerance
Second, the investor needs to find out his or her risk tolerance. There are several calculators on the internet that can help to calculate investor specific risk tolerance. This calculator will provide a range of risk tolerance. Ending up in the defensive end means the investor wants a conservative split between high risk/high return and low risk/low return investment. Bonds are generally considered low risk/low return so a defensive tolerance indication means the investments should be split 75% in bonds and 25% in stocks. Should the calculator return an aggressive risk indication, a fund that splits investments 75% stocks and 25% bonds might be a better fit.
Managing and Maintaining a 401K Retirement Portfolio
Third, review the description on Google Finance for the particular fund that the retirement account statement indicates. The description should provide the split the fund subscribes to. Equities are stocks, so if the split says 60% is allocated (allocated means divided among) in equities and 40% is allocated in bonds then this fund would be considered a moderate fund (50/50 split is a true moderate).
Lastly, adjust the investment portfolio to match the risk tolerance levels indicated by the calculator. The tolerance quiz might indicate the current investment fund is adequate to meet the investor's goals. If it does not, then contact the fund administrator to find out how to move money into a better fitting fund. Ask the fund administrator for a list of funds available, research the funds on google.com/finance, and move the contributions into the best fitting fund.
At least yearly, investors should check his or her retirement statements and adjust contributions and funds to meet his or her current investment needs.
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