By Steve Hoover

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 Wealth Partners Corporation, 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 your free 15-minute introductory phone call today! Be sure to check out our podcast, The Retirement Pilot, and register for our free webinar, 10 Strategies to Reducing Unexpected Risk to Your Retirement Savings, so you can learn how to protect your wealth by expecting the unexpected.

About Steve

Steve Hoover is president of Wealth Partners Corporation with over 20 years of experience in the financial industry. Steve is passionate about helping his clients take control of their finances so they can feel confident about their future. Steve has bachelor’s degrees in both journalism and Spanish literature from the University of Kansas and holds a Series 65 license in Kansas, Missouri, and Texas. He has been featured on several news outlets, received the KC Magazine Five Star Wealth Manager: Best in Client Satisfaction Award for six consecutive years, and hosts The Retirement Pilot podcast. Steve resides in Leawood, Kansas, with his wife, Sherri, and their two children. To learn more about Steve, connect with him on LinkedIn and register for his free webinar, 10 Strategies To Reducing Unexpected Risk To Your Retirement Savings, so you can learn how to protect your wealth by expecting the unexpected.

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

(2) https://www.investopedia.com/advisor-network/articles/021517/25-investing-statistics-you-need-know/

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