By Gary Cassell
Do you like to race cars, skydive, or run with the bulls? Yeah…me neither! Because most of us prefer calmer recreational activities, we usually claim to live fairly risk-free lives. However, whether we realize it or not, we all take risks every day. (I’m not just talking about texting while driving—but please don’t do that!)
I’m talking about your 401(k). I’m sure you’ve heard about how important and necessary a 401(k) plan is for retirement, but have you considered the risk associated with it? Although it’s a beneficial investment opportunity, inherent risks do come along with it, such as choosing appropriate funds or understanding hidden fees. Let’s be honest, when was the last time you analyzed your 401(k)—or even logged into your account? Do you know how much risk is in your 401(k)?
Why Is A 401(k) Unique?
Your 401(k) differs from other accounts in a few ways and plays a specialized role in your financial planning. First, you likely receive your 401(k) from an employer who may match contributions, giving you more incentive to contribute a larger percentage of your income. Furthermore, you also have the ability to choose how and where your money is invested, and your contributions are made on an after-tax basis. At the maximum, you and your employer can contribute jointly up to $57,000 (for 2020) or $63,500 for those aged 50 or older. (1)
However, a 401(k) does require maintenance. Your company provides a way for you to save for retirement, which is great, but their job does not typically include vital aspects such as helping you manage the risk in your account, providing professional investment advice, or giving insight into fees you may not be aware of.
So what can you do to ensure your 401(k) is working hard for your financial future and isn’t carrying too much risk?
Can You Avoid 401(k) Risks?
The more you know about something, the more you can prepare for it. Let’s look at a few risks 401(k)s are susceptible to and ways you can seek to avoid them.
401(k) values typically rise and fall with the stock market, meaning they don’t offer protection from losses. If the stock market does well, so may your 401(k). But if it drops, so can your retirement account, no matter how soon you need the money. The key to helping mitigate this risk is to maintain the proper asset allocation for your risk tolerance level. Examine the investment options offered by your company and choose the ones at your risk level, being sure to diversify your choices accordingly.
Most companies enroll their employees at a 3% contribution rate, but 3% will not get you to your retirement goals. Likewise, many plans choose allocations for you, but are those really the best choices for your situation? Because of the many decisions that come with starting and managing your 401(k) account, many people employ a “set it and forget it” method, neglecting to review its progress and regularly rebalance. In fact, 25% of workers with a 401(k) have never made adjustments to their account. (2) In a matter of a few years, those who neglect their 401(k) may realize that their account no longer reflects their risk tolerance, time horizon, and needs. Take the time to create a 401(k) strategy, check in with your account to rebalance, and increase your contribution rate as your financial situation allows.
Relying On Company Stock
If you have the option to purchase employer stock, be sure to exercise caution. This is important because if your company performs poorly, it will depress the stock price and could lead to layoffs as well. Depending on how much company stock you own, there goes a portion of your portfolio, your income, and your health insurance all at once. Sadly, many people have experienced this. Back in 1999 when Enron filed for bankruptcy, more than $1 billion in employee retirement savings simply evaporated. Many Lehman Brothers employees experienced the same thing as well. (3)
According to a survey commissioned by retirement investment advisory firm Rebalance IRA, nearly half of investors don’t think they pay any fees in their retirement accounts, and 19% believe their fees are less than 0.5%. But the reality is, you may be paying closer to 2% or 3%. Depending on the account and company, mutual fund fees can be staggering and consume a large chunk of your gains. On top of that, there are many undisclosed costs (such as transaction fees, bookkeeping fees, finder’s fees, etc.) that eat away further at your retirement dollars. By choosing investments with lower fees, you may be able to pursue higher returns.
Lack Of Investment Guidance
The average 401(k) plan offers 25 investment choices. While options are good, sometimes too many can confuse and overwhelm investors. Without sufficient investment knowledge, employees may choose a little of each and end up with a portfolio that isn’t diversified or appropriately aligned with individual needs.
Get Your 401(k) On Track
After reviewing these common and potential risks, how confident are you that your 401(k) is on track to help you pursue your retirement goals? You work hard to save for retirement; don’t be passive about preserving it. If you’re feeling uncertain, I recommend that you meet with a financial professional to review your strategies.
We at Premier Wealth Advisory Services are ready to help you create a retirement strategy that gives you a clear view of what you need to do to safeguard your 401(k), seek to avoid unnecessary risks, and work toward your goals. We’ll help you understand how your employee retirement plan works, how to optimize your benefits, and coordinate your plans with your other retirement and investment strategies. Reach out to us by calling (636) 532-7337 or scheduling a consultation using our online calendar.
Gary Cassell is president of Premier Wealth Advisory Services, an independent, fee-only wealth management firm. With over 25 years of experience in the financial industry, Gary is passionate about helping families, business owners, and executives live their lives by design, not by default, through personalized wealth management and unparalleled service. Gary earned a bachelor’s degree in physics from Hastings College and is a long-time resident of St. Louis, where he lives with his beautiful wife and two wonderful children. When he’s not working, you can find Gary spending time with his family, hiking, playing tennis, walking, and brewing beer. To learn more about Gary, connect with him on LinkedIn.