Provided by Terry Garland and written by Indigo Marketing Agency, a non-affiliate of First Allied Securities, Inc.
If you skydive regularly or drive race cars, you pretty much know you are living a high-risk lifestyle. However, we are willing to bet that you don’t do these things and therefore consider yourself to actually be living a pretty risk-free life. But the truth is, we all take risks every day, whether we are aware of them or not. The problem lies in the fact that we don’t usually truly consider the risks we take until we are already in peril; by then it’s too late to do anything to safeguard ourselves. Some areas of risk may be less detrimental than others. But one thing is certain: you do not want your financial well-being to be in this hazardous situation, especially when it comes to your retirement savings.
You probably often hear how important and necessary a 401(k) plan is for retirement. And while your 401(k) does play a prominent part, it is vital to realize that with such a beneficial investment opportunity comes inherent risks ranging from choosing appropriate funds to understanding hidden fees, and everything in between. So, the burning question is, 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?
A 401(k) differs from other accounts in many ways, playing a specialized role in your financial plan. For instance, you likely receive your 401(k) from an employer who may match contributions, encouraging you to contribute a larger percentage of your income, up to $56,000 jointly between you and your employer for 2019. That limit is set even higher for those aged 50 or older. In addition, with your 401(k) you have the ability to choose how and where your money is invested, and your contributions are made on an after-tax basis.
Having your company provide a way for you to save for retirement is a wonderful benefit. Nonetheless, just because it is provided by your employer does not mean your 401(k) doesn’t require maintenance. They do not make it their job to help you manage the risk in your account, give investment advice, or give insight into fees you may not be aware of. When it comes to these critical issues, you are on your own.
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?
Surely you have heard the saying “knowledge is power,” and that certainly rings true here. The more you know, the more you can protect and prepare. So, let’s look at a few risks 401(k)s are susceptible to and ways you can avoid them.
Improper Allocation
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 does your 401(k). But if it drops, so will your retirement account, no matter how soon you need the money. The key to avoiding this risk is to maintain the proper asset allocation for your personal risk tolerance level. To do this, you will need to examine the investment options offered by your company and choose the ones at your risk level, being sure to diversify your choices accordingly.
Setting Autopilot
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 become overwhelmed and choose to simply “set it and forget it,” neglecting to review its progress and regularly rebalance. In fact, 25% of workers with a 401(k) have never made adjustments to their account. (1) The reality is that in a matter of just a few years, those who neglect their 401(k) may realize that their account no longer reflects their risk tolerance, time horizon, and needs. This is a sobering and dangerous realization. In order to avoid this, make sure to take the time and 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 and you choose to do so, be sure to exercise this option with caution. Just think, do you really want so much of your financial well-being dependent on one company? The main reason this is important is that if your company performs poorly, it will depress the stock price and could lead to layoffs as well. There goes 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. (2)
Ignoring Fees
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 are likely 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 further eat away at your retirement dollars. By choosing investments with lower fees, you may be able to achieve 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 their individual needs.
Get Your 401(k) On Track
Now that you know some of the most common risks, do you know if your 401(k) is on track to get you to your retirement goals? Are you realizing that it’s possible your strategies need some important adjustments? You work hard to save for retirement; don’t undermine that by being passive about protecting your nest egg.
Here at Golden Capital Management, we want to help you create a retirement strategy that makes it easy to understand what you need to do to protect your savings and achieve your goals. We can help you understand how your employee retirement plan works, how to optimize benefits, and make sure you coordinate your plans with your other retirement and investment strategies. Call us today at (515) 226-0115 or email info@garlandandassoc.com.
*This information is for general purposes only. This information is not intended to be a substitute for specific professional financial advice. Please see a financial professional in regards to your own individual situation.
About Terry
Terry Garland is the founder and CEO of Golden Capital Management with more than 25 years of industry experience. He works with individuals, small-to-medium-sized businesses, and medical professionals, including physicians and dentists, allowing them access to a wide variety of specialized services and investment vehicles to fit their specific needs. He graduated from Drake University and attended the Wharton School at the University of Pennsylvania and is a certified wealth strategist and a registered principal. With offices in Des Moines, Iowa, and Carlsbad, California, he serves clients across the country. Learn more by connecting with Terry on LinkedIn.
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(1) https://www.cbsnews.com/news/401ks-why-set-it-and-forget-it-can-be-a-disaster/