How Much Risk Is In Your 401(k)?

Published by Daniel Morrison, Wealth Advisor

Do you have a 401(k)? Maybe a better question is: Do you know how your 401(k) works? If you’re like 63% of Americans, this common retirement plan completely confuses you. (1)

But don’t go sticking your head in the sand! Your retirement and how you save for it are too important to ignore, no matter how complicated it seems. A 401(k) is a valuable and important tool to help you build your retirement nest egg so it’s there when you need it, but like most things, it’s how you use it that matters. And in this case, what you do to minimize risk can make a significant difference at the end of the day. Here are 5 ways to do just that. 

1. Choose The Right Investment Mix

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. 

Diversification is the key to reducing risk in your 401(k). Don’t put all your money in a few companies. Instead, spread your money out over hundreds of companies to lower your chance of losing money in the long run.

This is why you should also consider rolling over old 401(k)s. If you’ve switched jobs and have multiple employer-sponsored accounts to your name, each of these accounts could have different portfolio mixes and risk levels. If possible, roll over these accounts so you can get a clear picture of your current investment strategy. 

Then choose a portfolio mix based on your current age and financial goals. For example, if you’re in your 20s and just getting started with investing, you may choose a moderate portfolio with 60% stocks and 40% bonds. If you’re nearing retirement, you may want a more conservative portfolio with 50% stocks and 50% bonds.

2. Watch For Fees

If you thought you didn’t pay fees in your 401(k), you’d be wrong. Fees vary based on the type of retirement account you have, but they can easily eat up a large part of your return. Some of these fees may be obvious, while others may be hidden. Common fees include transaction fees, bookkeeping fees, and finder’s fees, to name a few. Choose investments with lower fees so you can keep more money in your own pocket for retirement.

3. Don’t Play The Market Game

Most active traders garner the lowest returns. Between 1992 and 2006, 80% of active traders lost money, and only 1% of them were profitable. (2) The takeaway? Don’t try to time the market. You’re guaranteed to fail. Instead, invest for the long term and keep contributing to your retirement account every month. If needed, rebalance your account once a year. There’s no need to do any more than that.  

4. Be Proactive

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 since they don’t know your goals and your values, are those really the best choices for you? 

It’s all too easy to just “set it and forget it,” deciding how much you want to contribute, choosing an allocation profile, and hoping for the best. But in a matter of a few years, you may realize that your account no longer reflects your risk tolerance, time horizon, and planning 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. 

5. Get Tailored Advice

Retirement plans are confusing because there are so many options to choose from. Unless you’re an investment pro, you may unintentionally choose options that aren’t diversified and aligned with your goals. Protect your future retirement dollars by seeking help from a trusted financial advisor who takes the time to get to know you and what you want out of life. 

At Jacob William Advisory, we want to help you take care of the details so you can go back to doing what you love best while still having confidence in your future. We do this by helping you optimize your benefits and understand how your 401(k) works. To get started, contact our office by calling 410-821-6724 or emailing [email protected]

About Dan

Daniel Morrison is the co-founder and Managing Partner of Jacob William Advisory, a wealth management firm whose sole mission is to service their clients’ needs beyond their expectations. Dan Morrison has 27 years of industry experience, and for the past decade, he has been committed to building Jacob William Advisory into one of the foremost wealth advisory firms. Dan graduated from Towson University with a bachelor’s degree of finance in economics and obtained his master’s degree in finance from the University of Baltimore. He is a CERTIFIED FINANCIAL PLANNER™ professional and holds the designations of Chartered Financial Consultant® (ChFC), Chartered Life Underwriter (CLU), and Chartered Advisor for Senior Living (CASL). He and his wife Beth reside outside of Baltimore, Maryland, and have three wonderful children. Dan is involved in his church and he enjoys spending time with his family, playing golf, and sailing. A good book is also never far from his reach. Learn more about Dan by connecting with him on LinkedIn.




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