Is Your 401(k) on Track?

By Chris Palabe, CFS®, AIF®

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 no matter how complicated it seems, your retirement and how you save for it are too important to ignore. A 401(k) or 403(b) is a valuable and important tool to help you build your retirement nest egg so it’s there when you need it, but there are many variables that can impact your account. And in this case, what you do to align your investments with your financial plan 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 that if you must withdraw when the market is down, you could incur losses. If the stock market does well, so should your 401(k). But if it drops, often so will your retirement account, no matter how soon you need the money. 

Diversification is the key to managing risk in your 401(k). Don’t put all your money in a few companies or your own company’s stock. Instead, spread your money out over hundreds of companies using broadly diversified, low-cost mutual funds and ETFs (if you have a brokerage option) in your 401(k) to potentially increase your risk-adjusted return.

This is one reason that it can make sense to roll over old 401(k)s into your current 401(k) if you have good investment options or an IRA, which allows more investment choices. 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 and it’s harder to see where you might have too much invested in one segment of the market. 

If you hold multiple 401(k) accounts from past employers, there are some options to consider, some of which may help you get a clear picture of your current investment allocation, such as:

• Leaving the plan with your previous employer
• Moving your 401(k) funds into your new employer’s plan
• Cashing out your account
• Rolling over your 401(k) into an IRA

Palabe Wealth can assist with helping you formulate your goals if you haven’t already, and then develop a financial plan and investment allocation to help you pursue those goals.

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, recordkeeping fees, and operating expense ratios, to name a few. By choosing investments with lower fees, you have a better chance of keeping more money in your own pocket for retirement.

3. Don’t Play the Market Game

In investing, the long term is what matters. While a select few mutual funds might outperform their benchmarks in any given year, over time we see that this outperformance usually doesn’t last. No matter how hard they try, even the most highly educated and experienced financial analysts have no way of knowing what the markets will do on any given day. While we may hear stories of people who have found incredible success through the stock market, those who accurately time the markets are very lucky and very rare, and those who follow all the “ups” also have to follow the “downs.” If you want to see growth in your portfolio through the stock market, stick to your investment strategy and ignore the short-term noise.

4. Be Proactive

Do you know how much you need to save each month to reach your financial goals? Does that line up with how much you contribute to your retirement plan? Stay on top of your 401(k) details to make sure you are enrolled at the right contribution rate and your asset allocation is aligned with your goals and situation. 

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 on your account to rebalance if needed, and increase your contribution rate as your financial situation allows. By committing to pay yourself first (that is, contribute more to your investments), you can help stave off the gradual lifestyle inflation that is detrimental to so many Americans’ long-term financial health.

5. Get Tailored Advice

Retirement plans can be confusing because there are so many options to choose from and it can be challenging to integrate your 401(k) with your other investment accounts and assets. Unless you enjoy studying the markets and researching individual investment options, you may unintentionally choose options that aren’t diversified and aligned with your goals. Preserve 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 Palabe Wealth, 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, schedule a 15-minute introductory phone call or call us at 847-249-6600 to learn if we are the right fit for your financial goals.

About Chris

Chris Palabe is the founder and CEO of Palabe Wealth, a financial planning firm providing retirement plan strategies for businesses and individuals. For 25 years, Chris has been serving his clients with customized plans and a boutique approach. He started his firm because of his passion for making a difference in others’ lives and a genuine desire to build long-term relationships with his clients so they can seek to achieve their ideal retirement and manage risk. Chris is a Certified Fund Specialist (CFS®) and Accredited Investment Fiduciary (AIF®) professional and has a degree from Université Denis Diderot (Paris VII). When he’s not working, you can usually find him riding horses and competing in dressage at a national level. He also loves reading, watching movies, and eating out. To learn more about Chris, connect with him on LinkedIn.

This blog post was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this blog post.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

No strategy assures success or protects against loss.

This material was prepared for Palabe Wealth, Inc.’s use.

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(1) https://www.cnbc.com/2019/03/07/63-percent-of-americans-are-confused-about-401k-retirement-plans.html