By Harlan Storey​

Since we don’t like to race cars or skydive, many of us consider our lives to be pretty risk-free. However, whether we are aware or not, we all take risks every day. And truthfully, taking risks is not necessarily always a bad thing. In fact, it’s pretty much impossible to go through life having risked nothing. The trouble comes when we don’t think through the possible outcomes of the various risks we take until we’re hit with an undesirable consequence. And by then, it’s too late to do anything about it. And no one wants to be stuck in a detrimental situation, especially when it comes to your finances and retirement savings!

Chances are that you fairly regularly hear about how important and necessary a 401(k) plan is for retirement. Unfortunately, the inherent risks that come with such a beneficial investment opportunity, which can range from choosing appropriate funds to understanding hidden fees, are far less commonly discussed. Let’s be honest, 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?

Your 401(k) differs 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 vital aspects such as 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.

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 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.

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 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)

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 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

So, now that you are aware of these common and avoidable risks, how confident are you that your 401(k) is optimally set to get you to your retirement goals? You work hard to save for retirement; don’t be passive about protecting it. If you’re feeling a little unsure, your best next move is to simply come on in and see if your strategies need some adjusting.

We at Storey & Associates are ready to help you create a retirement strategy that gives you a clear view of what you need to do to safeguard your strategies and achieve your goal. We can help you understand how your employee retirement plan works, how to optimize your 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. Get in touch with us today by calling 330-526-8944 or shoot us an email at info@storeyassociates.com. Or, if you prefer, you can quickly and easily click here to schedule your free initial consultation online.

About Harlan

Harlan Storey is president and founder of Storey & Associates with more than 30 years of experience providing financial counsel to individuals, families, and small businesses. With a background as an estate planning attorney also providing tax services, Harlan now advises a clientele consisting of corporate executives, medical professionals, small business owners, and retirees. He specializes in income tax planning, business exit strategies, estate and insurance planning, asset allocation, and career transitions. In addition to his role as a financial advisor, Harlan is a member of the firm’s investment committee and manages the operations of the business. Harlan is a CERTIFIED FINANCIAL PLANNER (CFP®), member of the Financial Planning Association (FPA), and graduated from the University of Akron with degrees in accounting and law. Harlan was one of the earliest members of the National Association of Personal Financial Advisors (NAPFA), showing his commitment to fee-only financial planning. Harlan and his wife reside in North Canton, Ohio, and are the parents of two adult children. He enjoys spending time outdoors, running, kayaking, and tending to their two horses. Learn more about Harlan by connecting with him on LinkedIn.

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(1) https://www.cbsnews.com/news/401ks-why-set-it-and-forget-it-can-be-a-disaster/

(2) https://www.fidelity.com/viewpoints/stock-plan-mistakes