By the late 70s, employers were finding it too complex—and expensive—to offer and maintain pension plans for their employees. So, as part of the Revenue Act of 1978, employers were given another option to give employees reasons to stick around: the 401(k) plan.1 Of course, from the employees’ perspective, this meant a lot of new choices as well. Which stocks or mutual funds should they pick for their plan? How much should they contribute? And, perhaps the most common choice they’d have to make until they retired: How often do I look at my 401(k) balance and, if I think it could do better, what changes should I make?
Don’t Look Now
During times of high volatility, some people essentially don’t dare to look at their 401(k) accounts. But the ostrich effect is rarely a good thing.2 It’s not necessary to rebalance your plans every time you check, but it’s important to know that, depending on your plan, you’ll have that option frequently enough to impact your plan’s balance at retirement.
By law, an employer must allow adjustments to 401(k) plans at least quarterly. Some allow more frequent changes, either because a plan includes higher-risk options (so they’re required to allow more frequency) or simply because the employer decides to let changes happen more often. [3] In any case, every adjustment you make to your 401(k) should align with your long-term investment and retirement plans. Being informed is key, along with understanding all the various factors that can affect your 401(k) balance over the years.
Fees? What Fees?
Did you know that 95 percent of 401(k) plan participants pay fees on their plan?4 If you didn’t, you’re not alone. More than 40 percent of those with plans are completely unaware that they pay fees.5 Even though these fees represent a small percentage of your accounts, they add up to significant numbers over the years. Remember when you received your first paycheck and it was much less than you expected? Not the best feeling, and it can reappear when you’re old enough to start accessing the funds in your 401(k) account.
These fees are not hidden (by law, they can’t be), but a large percentage of people don’t fully understand the fees and, most importantly, which fees they can control. For example, plan provider fees are normally givens. But through their choices of investments within their plans, investors can at least try to control the impact fees will have on their retirement plan’s future.
Asleep at the 401(k) Wheel
So, with so much at stake (funding your retirement, which these days averages 30 years), why do so many employees resist taking a more active role in managing their 401(k) plan? One reason is “tradition.” A common rule of thumb has been the suggestion that, until you’re ten years out from retirement, there’s no reason to change anything. While this meshes somewhat with the idea of long-term investing—give holdings time to grow and become less susceptible to the occasional volatility dips—it ignores another investment principle: invest in companies you understand. In other words, many employees don’t take adequate time to read and process their 401(k) plan reports in order to make informed decisions about making changes. The alternative? Do nothing. In other words: set it and forget it.
Time to Get Active
Of course, there’s a different approach to managing your 401(k) plan that actually involves, well, managing it. An active 401(k) strategy can be essential to potentially maximizing your retirement savings. Rather than setting up a 401(k) plan and forgetting about it, you should monitor your investments at reasonable intervals, assess the risks involved, and adjust your portfolio when necessary. Yes, this strategy requires reviewing every element in your plan and should suggest doing research on any companies or funds held in it. But this is important homework to do, as it will have a direct impact on your future retirement.
The Takeaway
The original concept of the 401(k) was to offer employees retirement accounts with the potential for greater upsides than traditional savings accounts. Owning the stocks within the 401(k) does, of course, provide this advantage. But employees became used to the routine—usually infrequent—of selecting options within their 401(k) accounts. It was essentially a set-it-and-forget it “strategy.” Even for those who wanted to participate more actively in the selection process, there was no easy way for their financial advisor to help them make choices.
Today, many financial advisors have access to tools that enable them to help clients make decisions about their 401(k) accounts that will align with their overall plans for investment, retirement, and even estate planning. This is because 401(k) plans are considered “held away assets,” and these tools are designed specifically to give advisors a way to help manage them without specifically holding the assets. So, for those who have 401(k) plans and either already have an investment advisor or are planning to find one, that’s another good question to ask: Can you help me manage my 401(k)?
Sources:
1 https://www.guideline.com/blog/evolution-of-401k/#:~:text=The%20modern%20401(k)%20originated,created%20tax%20structures%20around%20it.
2 https://www.marketwatch.com/story/too-scared-to-check-your-401-k-too-worried-to-peek-at-your-brokerage-account-heres-when-you-should-look-and-when-you-should-go-for-a-walk-instead-11655302283
3 https://budgeting.thenest.com/can-change-investments-401k-32444.html
4 https://www.investopedia.com/articles/personal-finance/061913/hidden-fees-401ks.asp#:~:text=401(k)%20fees%20can%20range,the%20Center%20for%20American%20Progress.
5 https://www.gao.gov/products/gao-21-357
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