Common Pitfalls For 401(k) Investors.

Sunday, July 15, 2018 | Leave a comment

Estimated reading time: 12 minute(s)

401(K) Pitfalls

High Management Fees

The most common (and obvious) talked about pitfall to avoid inside 401(k) plans is avoiding paying high management fees.  It seems most of the talk around increasing account performance revolves around this strategy.

However, there is one very significant, but little talked about, pitfall that 401(k) participants should avoid that has nothing to do with management fees. Also, there is one correctable behavior that every participant should develop to increase their chances of having the largest retirement account balance possible for retirement.

Retirement Date Funds

Employees participating in workplace retirement accounts should avoid the “set it and forget it” mentality.  It’s a trap many people seem to be running right into.

Retirement date funds, also known as target date funds, have become the default fund of many 401(k) plans.  A recent report by Vanguard revealed, “Ninety-nine percent of all plans with automatic enrollment default participants into a balanced investment strategy—with 97% choosing a target-date fund as the default.”1

This means the majority of plans forced participants to choose these types of funds with little guidance as to the benefits of the other plan choices available to the participants, no matter their age and tolerance for risk.

Is easy the best?

Many people, by default, choose the “easy-road” target date funds offer without realizing the implications to their financial future.  For example, research has shown that many target date funds actually increased equity positions, increasing the investors risk to loss, in 2010 target date funds, prior to the stock market correction of 2008, thus exposing conservative investors, near retirement, to greater potential for loss during the biggest market correction in recent memory.

It could happen again.  Morningstar analyst Jeff Holt recently commented, “In the long run, the biggest risk in target-date funds is that they won’t meet investor expectations for avoiding losses.”

Be careful, these types of fund managers could have motivations contrary to the investors they serve.  Participants should avoid the pitfall of assuming “set it and forget it” funds do the best job of giving investors the best chance of having the most in retirement as opposed to utilizing all of the choices available in the workplace retirement plan.

That brings up the most common questions most investors ask, “I’m not an expert.  I don’t have the time to keep up with the constantly changing economy. How do I know what to choose?  How can I increase the chances I may have the largest account balance possible when I reach retirement?”

401(k) Solutions

A correctable behavior that 401(k) investors can develop to increase their chances of having the largest retirement account balance at retirement is…quarterly rebalancing their asset allocation per market conditions and their tolerance for risk.

Unfortunately, many 401(k) participants don’t make changes to their asset allocations for months and even years.  Imagine…not changing the oil in your car or updating the software on your digital devices regularly. I’m sure you’d agree your car’s and computer’s performance could suffer without regularly scheduled upgrades or maintenance.

Get Professional Help

Participants can receive independent fiduciary-based recommendations by using a tool named 401(k) Maneuver™.  401(k) Maneuver™ provides personalized recommendations each quarter to participants with the goal of increasing account performance during good markets and may better protect account balances during bad markets, versus “set it and forget it funds”.

401(K)Maneuver™ analyzes all of the investment choices available in a workplace retirement plan and sends recommendations each quarter that may best suit the investor per their individual tolerance for risk and market conditions.  The participants never have to meet with a plan investment salesperson or move their account away from their employer and they can enjoy independent fiduciary-based advice tailored to themselves personally.

401(k) investors can increase their chances of having the highest account balance for retirement by correcting 2 simple behaviors.

1. Avoiding retirement date/target date funds.

2. Quarterly rebalancing the 401(k) account by utilizing all of the choices inside the plan via independent fiduciary-based advice (offered by 401(k) Maneuver™) each and every quarter, per current market conditions and their tolerance for risk.

Simply and easily.