Do you worry about missing opportunities to protect and maximize your 401(k)? If so, you’re not alone. You’re like many of the successful clients we serve who just don’t have the time, the energy, the tools, or the expertise to customize, monitor, and execute their 401(k) strategy.
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Many investors often hit the easy button. They choose the default investment option, the one their employer chooses, and often, it’s a target-date retirement fund. It’s easy. Or they pick a mix of investments; maybe their peers, their parents, or somebody they respect helps them pick the investments in their plan. They set it and literally forget it. Again, the easy button.
They often don’t revisit the strategy until just before retirement, which could potentially result in missing some significant opportunities. At One Life Financial Group, we believe you work way too hard for the money in your 401(k), and that your wealth is a tool that can help you secure your future and make the most of your one life. Pun intended for that one!
If you’re new to our money marathon series, I’m having a ton of fun using some marathon stories and analogies to explore how you can get more potential mileage out of your hard-earned money. And even if you’re not a marathon runner, hitting the easy button in marathon training by sleeping in will probably not help you maximize your results on race day!
Today, we’re going to explore questions for 401(k) investors. Could hitting that easy button potentially cost you in the long run by using a set-it-and-forget-it approach?
First, I will share three potential opportunities that marathon runners and investors could potentially miss when using that set-it-and-forget-it approach with their marathon training or 401(k) investment strategy. And when I say 401(k), I’m referring to all company retirement plans, not just 401(k) plans. So, if you have a 401(a), a 403(b), a 457 deferred compensation plan, a SIMPLE IRA, a SEP-IRA, a tax-sheltered annuity, or a TSP through the government, I’m talking about your company retirement plan as well when I use the word or the term 401(k).
After exploring those potential missed opportunities, in future posts we’ll cover an alternative approach that both marathon runners and investors can take to maximize results and mitigate those potential missed opportunities.
Third and finally, you’re going to gain access to a complimentary 401(k) health checkup to see if you may be at risk of missing some opportunities to maximize and help protect your 401(k).
Oh, and I almost forgot. We will explore the question of how much that common strategy could potentially cost you.
I’ll admit that I’m a little distracted today, like I’m forgetting things, talking too fast, because the 2024 Grandma’s Marathon race is tomorrow. So literally, I’m out the door to Duluth as soon as this blog is complete.
And before we dive into those missed opportunities, I do have a confession to make. A year ago, for Grandma’s Marathon in 2023, I used a set-it-and-forget-it approach to my training strategy. It was a printed plan off the internet, and the results weren’t terrible, but I definitely didn’t maximize my results. I did something different this time; I took an alternative approach, so let’s dive in.
Opportunity #1 you could miss with a set-it-and-forget-it approach: An opportunity to customize your plan
For runners, their set-it-and-forget-it strategy basically doesn’t provide customized pacing (which is how fast a runner can run based on their ability). Using a set-it-and-forget-it approach to training is a really easy way to overtrain when you don’t know your paces. If you go too fast, you could hurt, or if you go too slow, you’re undertraining for your race and not reaching your potential.
I purchased my marathon plan off the internet. It was designed to run a 3-hour and 30-minute marathon. That was the plan, but the problem was I didn’t do any stress tests. I didn’t know what I was capable of doing or how fast I could run, so it wasn’t customized to my actual ability.
I ended up going out way too slow in my first marathon, and I didn’t realize it until mile 13, when I called my friend Eric. Eric yelled at me, “Get off your bleeping phone; you’re going too slow!” I realized then, oh my gosh, I’m capable of going faster. So, by then it was too late to run the best race I was capable of because I didn’t adjust until mile 13.
And I probably would not have adjusted without him. I ran 3 hours and 22 minutes when I might have been capable of running 5-10% faster if I had a customized plan. It wasn’t the end of the world. I had a blast, but I definitely missed an opportunity to run my very best race.
So what does all of this have to do with investors? Well, investors using that set-it-and-forget-it approach or a target-date retirement fund that is geared to a specific year in the future, aren’t using a customized strategy either. The problem with those set-it-and-forget-it strategies is they’re not customized to your rate of return goals that you need to earn in your financial plan ( which are changing all the time, by the way.)
For example, if your plan’s calculated return needs a 9% return, and the strategy in your 401(k) has an expected return of 7% between now and retirement, that can lead to missed potential opportunities to implement your plan’s customized strategy. This could lower your plan’s probability of success and might cause you to worry and not feel as confident in your future.
Now, if you don’t have a financial plan, you won’t know your required rate of return, which makes it difficult to customize a 401(k) strategy with confidence. Many people don’t have a financial plan and they’ll often hit that easy button, the set-it-and-forget-it target date fund, because they just don’t know what their strategy should look like.
That’s one takeaway for today—get a financial plan if you don’t have one! Figuring out your goal rate of return can help you and your wealth manager customize your strategy to target your specific rate of return goals.
Opportunity #2 you could miss with a set-it-and-forget-it approach: The ability to manage concentration risk
You’ve likely heard the phrase “Don’t put all your eggs in one basket” with investing because it can be potentially risky to have too much money invested in one company’s stock, which is why many wealth managers and experienced investors limit their exposure to 5% in one company’s stock, or sometimes even less, maybe 2%-3%. That way, the concentration risk is limited if that stock goes bankrupt.
What does this have to do with the 401(k) concentration risk opportunity?
Hypothetically, assume you had a grandparent who passed along stock to you in ABC company, and it was worth half a million dollars. Let’s also assume you have a 401(k) and the fund manager has 3% of your entire 401(k) invested in ABC company stock. Now, you even have more of that stock, increasing your concentration risk to ABC company, which is probably a large chunk of your portfolio if you have $500,000 in that one company.
That’s the second opportunity that could potentially be missed with that set-it-and-forget-it strategy or the easy button. The fund manager has no clue what you own outside of your 401(k), since their strategy is typically managed just for the masses and they can’t reduce the risk associated with ABC company, even if they wanted to help you, because of their requirements to manage that strategy for the masses.
Opportunity #3 you could miss with a set-it-and-forget-it approach: You could miss out on a values-based investment opportunity.
Over the last 10 years, and even more over the last 5, I have had many clients who have asked us if they can access sustainable investment strategies.
Not everyone has this goal, and if you don’t, that’s okay. However, many clients we serve want a portion of their money invested in sustainable investment strategies, which might help avoid investing in companies cited for child labor law violations.
I rarely see 401(k) investment options that offer access to sustainable strategies. Investing in those strategies does not guarantee you’ll get a better return. It might be worse; it could be better than a non-sustainable strategy. However, not having those options in a 401(k) investment lineup can prevent investors with sustainability goals from using or accessing those values-based wealth management strategies within their 401(k).
So, in summary, three opportunities you could miss when using a set-it-and-forget-it approach are:
- You could miss out on the ability to customize a strategy that targets your specific returns in your financial plan.
- You could miss out on the ability to manage concentration risk.
- You could miss out on a values-based investment opportunity.
If you are interested in an alternative approach to a “Set-it-and-forget-it” strategy to your 401(k), stay tuned for the next blog post, where I will discuss what that is.
You can also click here to learn more about our 401(k) services, or schedule a consultation by clicking the button below for a complimentary consultation.
All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. The information provided is not based on actual current or past clients. All situations are unique, and results will differ depending on an individual’s676 situation.