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How Much Risk is in Your 401(k)? Thumbnail

How Much Risk is in Your 401(k)?

By Bryan Lee, CFP®, MBA

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) 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 reducing 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 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. Consider rolling over these accounts so you can get a clear picture of your current investment allocation. 

Then choose a portfolio mix based on your financial goals, objectives, time horizon, and risk tolerance. Strategic Financial Planning 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 reach 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

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, since most studies prove it can’t be done consistently over the long-term. Instead, invest for the long-term and keep contributing to your retirement account every month, allowing you to buy more shares when the market is down and buy fewer shares when the market is up. If needed, rebalance your account at regular intervals or when your allocation becomes skewed too far towards a particular asset class. 

4. Be Proactive

Many companies enroll their employees at a 3% contribution rate, but 3% likely 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 situation, 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 on your account to rebalance if needed, and increase your contribution rate as your financial situation allows. By committing to paying yourself first (that is, contributing 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. 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 Strategic Financial Planning, 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, call us at (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit.

About Bryan

Bryan Lee is founder and President of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With over 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and MBA in international finance from the University of North Texas and is a Certified Financial Planner (CFP®) practitioner. Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including serving as President and Chairman of the Dallas/Fort Worth Chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, the CITY House Board of Directors President and Chairman, Editorial Review Board of the Journal of Financial Planning, Family Services of Plano, as well as a Junior Achievement Volunteer Teacher. Bryan has been featured in local and national magazines, newspapers, and journals, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, Dow Jones Newswires, and has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception. To learn more about Bryan, connect with him on LinkedIn.


(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/