Be sure to check your portfolio periodically

Besides not saving enough, one of the most common mistakes preventing 401(k) participants from achieving their retirement income goals is failure to pay close enough attention to the performance of their accounts.

To put this issue into perspective, for a 25year-old able to save $4,000 per year until age 65, the difference between earning an average annual rate of return of 4% ($380,102), 6% ($619,048) or 8% ($1,036,226) can have a serious impact on quality of life in retirement.

Let’s review the steps you should take to ensure your money is working as hard for you as you worked for it.

1. Find your rate of return

Determining your account’s actual rate of return should be easy. It’s generally made available online by your plan’s record-keeping service provider.

Calculating a timeweighted rate of return for an account with periodic contributions is no small feat, so expect your employer’s retirement plan administrator to do it for you.

2. Find a benchmark

The next step, determining if your account’s rate of return is satisfactory, is more difficult. What makes this step difficult is there’s no generic rate of return or benchmark everyone should be beating.

The rate of return you earn should be commensurate with the amount of risk you’re taking. The more risk you take, the higher the long-term rate of return you should expect.

Risk is best defined by the percentage of your account exposed to a short-term stock market sell-off. So someone who’s willing to absorb a 50% temporary decline in his or her retirement account and has at least five years before needing the money should be invested nearly 100% in the stock market.

Once you’ve determined the amount of risk you’re willing to take, you can use your plan’s target date retirement funds as your account’s performance benchmark. Find the target date fund with the most similar stockto-bond ratio and compare its return to yours.

3. Get back on track

If you determine your current investment strategy is not delivering adequate results, there are three courses of action you can take: Lower the costs of your strategy, adjust your strategy to include more risk or improve the quality of your investment management.

Replicating your current investment strategy with lower investment management fees may be the simplest course of action, if it’s available. That’s why employer plan accounts are so often a better environment than an IRA for long-term retirement investors, because a plan is able to use its size to negotiate lower investment management fees.

Be wary of “managed account” services. In our experience, they add very little value over a traditional target date fund and are often meaningfully more expensive.

Increasing the amount of risk in your portfolio is another way to potentially boost returns. The key is selecting your portfolio strategy not by the return desired, but by the downside risk you’re willing to tolerate.

If your conservative approach is not getting you to where you need to be, and you’re able to stomach larger shortterm declines, increasing your exposure to stocks should boost portfolio results over the long run.

The final approach, improving the quality of your investment management strategy, can be tricky: Do not let an attempt to improve returns turn into a market-timing misadventure. Instead, work on improving your portfolio diversification and stick with it.

Finally, if you decide you don’t have the time or interest to work on this, consider switching to your plan’s target date fund.

For most, your 401(k) account is key to your financial security in retirement. You owe it to yourself to periodically review how it’s performing. The rate of return you earn is second only to the amount you save in determining how much you will have waiting for you in retirement.