This month’s discussion of organizing your retirement planning, a critical step in organizing your finances, has been very helpful to me personally.  I still don’t feel that I have a complete grasp of everything 401(k)-related, but I have learned quite a bit about where to focus my efforts.  For those who want the advice in a quick checklist format, here it is:

Actions to Take at Any Time but Particularly Before You Invest in a 401(k) Plan

1.   Check out your 401(k)’s rating on brightscope.com – The brightscope rating doesn’t tell you a whole lot about your plan but it does give you a general sense of how well your plan is performing compared to 401(k) plans at other companies.  When we looked up our plans, our lowest-rated plan (rated “average”) had given us a far lower rate of investment return (about 66% lower) than another of our plans rated in the “average-high” category with roughly equivalent investment allocations.  If your plan is rated poorly, you might consider what other investment opportunities are available to you and whether the employer match and/or tax benefits outweigh the plan’s poor performance.

2.   Check out the loan and withdrawal provisions for your 401(k) Plan – While you should intend never to withdraw your money until retirement, you should at least know whether you have the option to take a loan and/or early distribution from your plan should you ever have a true emergency.

3.   Check out the Morningstar rating for each mutual fund you invest in – From my experience, you can’t rely on the Morningstar rating exclusively but in general, funds with a 4 or 5 rating do better than lower-rated funds.  If your plan contains only low-rated funds, you might not want to invest very much into your plan or consider other options.

Actions to be Taken Annually

4.  Review/update your retirement contribution projections – This would be a good task to do perhaps at the end of the year when you are putting together your resolutions and budgeting for the next year.  Review how your 401(k) investments have done, check the rate of inflation and plug it into a calculator (such as one of the calculators I described here), to see if you are on track.  If you are unable to contribute in a given year, run a quick check on how much additional money you will need to be contributing in the future to stay on track for your retirement goals.

Actions to be Taken Quarterly

5.   Review Your Quarterly 401(k) Statements – At a minimum, you should be checking in on your 401(k) every 3 months to see how you are doing.  The quarterly statements issued by your plan will tell you how much money you contributed, how much your employer contributed and how much money you invested in each fund in the plan.  Learn from my mistake and make sure that you are saving these statements either on paper or electronically in case you need them for future reference.  It is a good idea to track the raw dollar amount you contributed to the plan as a whole and in each fund in a spreadsheet for yourself, since what you want to focus on is how well a fund is doing based on the dollars you put in versus the current market value.  Your 401(k) statement may do this for you but we found in our plans that often the 401(k) statement was readjusting its return calculations based on the market value of the prior statement.  So, if the market fell one quarter and you actually lost money on the first statement and then the market rose in the next quarter, all the next statement might tell you is that you had a positive return compared to the first quarter, while in truth, you still might have less than your initial investment.

6.   Review Your Investment Mix – Using the quarterly statement, see how much money you have invested in various types of investments.  The 3 main categories are stocks, bonds and cash-equivalents but some investment strategies require you to be even more specific such as small-cap, mid-cap, large-cap and international stocks.  Check to make sure your investment mix makes sense for your age.  Most 401(k) plans have investor information on their websites to help with these types of decisions.  You could also consult a good investing book or professional adviser.  If your investment mix is off, you may need to “rebalance” which means that you sell/transfer moneys between your different funds or adjust how future contributions are allocated.

Actions to be Taken Continually

7.   Use Technology to Track Your 401(k) – If you use an automatically updating financial took, like Quicken or Mint.com (a free service), your 401(k) balance can be updated with minimal effort from you.  I used to think that this was the way to stay on top of a 401(k) but the level of detail here is too much.  For most people, knowing the exact purchase price of each buy in each fund and the amount of dividends issued in your plan is not something that is going to make a lot of sense in terms of evaluating how your money in general is doing.  Your quarterly review (see #3 above) where you take a step back and focus on the big picture is going to be a lot more helpful in this regard.  What the continual updating will do for you is let you know when/if there is a large change in the stock market and if something unusual goes wrong with your plan.  You should always have a basic sense of how much money is in your plan.  You could also set up an automated stock alert to track movements in the mutual funds in your plan, such as through Yahoo!.  I have not done that yet myself and am not sure whether that information is helpful or overwhelming.

8.   Stay up-to-date on 401(k) News and Investing Tips – There isn’t one easy way to do this but reading a good financial news source, such as one from a major newspaper or a specialized publication like The Wall Street Journal or Investor’s Business Daily, is very helpful.  Investing advice changes all the time.  Most people aren’t going to be able to use this information for specific investing strategies in their 401(k) without first learning a lot more about investing.  However, being aware of general changes in the economy, where financial experts expect investments to go and personal finance strategies can be enormously helpful.  If you feel overwhelmed by this or you are not very interested in investing in general, you might choose to focus on one financial guru to follow.  Suze Orman has been helpful to me but there are certainly many to choose from.

Take a moment now to put a reminder of these tasks in your calendar of choice.  I am going to enter in 3 quarterly update reminders to check/download our 401(k) statements and one end-of-year update to update the last quarterly statement, check Morningstar and brightscope ratings, review whether the loan/withdrawal provisions have changed in our plans and review our retirement projections.

Have I missed a critical tip?  Is there something else you would add?  Please share in the comments.