By Kevin Roberts
If you don’t do things like race cars or skydive, chances are you may consider your life pretty risk free. But the fact of the matter is, whether we are aware of them or not, we all take risks every day. Taking risks is not necessarily always a bad thing. In fact, it’s pretty much required in life. However, the trouble most of us face is that we don’t usually think about the possible ramifications of the different risks we take until the unexpected happens, and by then it’s too late to do anything about it. That is a situation you want to avoid in all areas of life, especially your finances and retirement savings!
Chances are you hear rather frequently about how important and necessary a 401(k) plan is for retirement. Unfortunately, less commonly discussed are the inherent risks, from choosing appropriate funds to understanding hidden fees, that come with such a beneficial investment opportunity. 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) is different 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 $56,000 (for 2019) or $62,000 for those aged 50 or older.
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 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 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 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 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. (1) 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. Do you really want so much of your financial well-being tied up in one company? This is important because 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)
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 eat away further 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 individual needs.
Get Your 401(k) On Track
Now that you know these common and avoidable risks, how confident are you that your 401(k) is on track to get you to your retirement goals? If you’re feeling a little unsure, it might be that your strategies simply need some adjusting. You work hard to save for retirement; don’t be passive about protecting your nest egg.
We at Roberts CPA Group and Lifetime Wealth Design are ready to help you create a retirement strategy that gives you a clear view of what you need to do to achieve your goal. We can help you understand how your employee retirement plan works, how to optimize benefits, and coordinate your plans with your other retirement and investment strategies so that you avoid unnecessary risks and understand the steps you are taking to reach your goals. To get started, send me an email at email@example.com or call my office at (502) 426-0000. Or, if you’d prefer to simply click a button, click here to schedule an appointment with me online!
Kevin Roberts is a CPA and CFP® specializing in providing virtual CFO services to individuals, families, small businesses, and professionals in the medical, professional service, and restaurant industries. He has more than 20 years of experience in accounting and taxes, and more than seven years in the financial services industry. Regardless of the services he provides, Kevin strives to offer clients confidence knowing that their financial aspects are being addressed and monitored by professional and competent individuals. Based in Louisville, he works with individuals, families, and businesses throughout Kentucky. Learn more by connecting with Kevin on LinkedIn or emailing firstname.lastname@example.org.