It’s 2024. Things are changing like never before. We’ve got a heated election coming up — and, in fact, there are more elections around the world this year than any other year before. There are some pretty major wars going on. And, as pressing as all of that external geopolitics is, you probably have plenty going on in your personal life, too.
So with all of the chaos going on in the “macro” side of life, it would be easy to take the easy option in the “micro” of personal finances: Your Set It and Forget It 401k. Why bother with more complex investing when there are so many other things to deal with? Why not just settle for the easy choice?
Many millennial investors believe that once they set this kind of investment up through their employer, there’s no need to think about it further; they can just leave it to grow. While this is true to a certain extent, we believe that taking this approach could lead to significant missed opportunities down the road.
In this blog post, we’ll explore the risks of a passive 401k strategy, provide actionable tips for actively managing your retirement funds, and show you how to optimize your 401k for future financial success.
Understanding the Risks Associated with Your Set It and Forget It 401k
Your set it and forget it 401k strategy might seem convenient now, but it could ultimately entail risks that undermine your financial security in the long-term. Ignoring your 401k means you may miss out on opportunities to maximize your returns and safeguard against market fluctuations.
1. The Passivity Problem
At the most basic level, consider the impact of failing to rebalance your portfolio at regular intervals. Over time, your asset allocation is likely to drift from its original allocation due to years of positive stock market performance.
Let’s say you started with a balanced mix of 60% equities and 40% bonds; a bull market — like the one in 2023 — could quickly shift this to 70% equities and 30% bonds, exposing you to higher risk than you initially intended, and potentially snowballing in the same direction the longer you leave it untouched.
This might seem harmless, or even desirable, at first, when the markets remain strong, but investment vehicles like 401ks are supposed to help provide for your retirement in a measured and relatively low risk way. They are meant to faithfully, steadily accompany your working career: potentially up to fifty years of your life!
With the unbalanced portfolio your set it and forget it 401k approach could bring, you might be jeopardizing the very thing you should be safeguarding: imagine it’s just a few years before you are due to retire, and the stock market suddenly has several really bad years… you could lose huge amounts through your now bloated stock proportion, at exactly the wrong time — all because you never rebalanced your set it and forget it 401k.
2. The Positivity Problem
Most employer 401k schemes offer dual optionality: (1) whether you want contributions taken out of your pay check at all and (2) what percentage of your pay check you want to contribute. Assuming you say yes to contributions (which we would advise), it could be tempting to choose a really low percentage — say, 1% or 2% — and then leave your set it and forget it 401k exactly the same from there on out.
This is what we would call the “positivity problem”: assuming that just because you have an automated 401k setup, you will magically receive everything you need later. Essentially, it’s a case of overlooking the long-term consequences of your short-term decisions. The answer to this particular problem is a healthy dose of realism and some simple math.
- Retirement Reality Check: Given that you won’t be earning a salary after your career ends, you are likely to find that retirement expenses are a lot more costly than you first thought — if you have thought about them at all! Typically, financial planners suggest that you plan for a retirement income that is 80% of your current income (multiplied over the length of your estimated retirement timeline).
- To prepare for that costly season, it would be well worth your while to maximize contributions when you’re younger and still earning, so that you can take advantage of compound growth in your portfolio. You can do this by bumping up your 401k contribution to the highest amount you can afford. This is especially effective if your employer matches your contributions.
- The secondary benefit of this is that you can maximize the possibility of stock growth when you are more able to absorb the risks associated with market volatility (as your salary should, in theory, help to insulate you from market shocks in the short-term).
- Although we flagged the “Passivity Problem” above, the idea here is that the younger you are, the higher you can afford your stock proportion to be — and then, as you get older, you can taper this percentage through careful rebalancing, in line with your changing risk profile. The key is that this is intentional, rather than passive: a calculated risk.
- The Simple Math: Speaking of calculated risks: at Iron Point Financial, we always recommend starting with the end in mind. In this case, that means working backwards from retirement to the present day to determine, in concrete number terms, what you will need to contribute now to (theoretically) secure what you need when it’s time to retire.
- There are plenty of free retirement calculators online that can give you an estimate of what you are likely to end up with based on your current contributions, and what you might need to adjust to if you have higher-value retirement goals.
At Iron Point Financial, we sit down with all of our clients to listen to their unique goals, and then, after we’ve done the math connected to those goals, we talk through the options available. Once you decide on an option that suits your situation, we will implement a bespoke strategy and walk with you for the rest of your financial journey. If that sounds attractive to you, why not reach out to us to schedule an appointment today?
3. The Proliferation Problem with Your Set It and Forget It 401k
The final problem with your set it and forget it 401k could actually be that you have multiple 401ks! It is increasingly rare to stick with a single job, at a single company, for your entire career. As a result, many people hop from one job to the next without considering what will happen to the 401k — or 401ks — with their old employer(s).
This is more common than you might think, and it’s also more of an administrative and financial nightmare than it might seem. It’s easier to fix the Passivity and Positivity Problems when you’re dealing with a single 401k portfolio; it’s much harder to be intentional with your finances when you have 401ks scattered all over.
Consider this relatable example from Greg Liszka, our President:
“We had a call the other day from a lady who was convinced that she had a work account from somewhere she worked 25 years ago that she never did anything with, and how is she supposed to find it? Well, that’s a great question, because the business changed ownership, and changed the plan multiple times… I guess she could call HR?
That was a very, very difficult one. In an effort to not get yourself into that kind of situation, maybe you should consolidate your plans so that there’s one contact, one spot, one strategy guiding the money rather than, “I don’t even know where it’s at!” If you keep it consolidated, you only have to track one statement.”
It’s also worth bearing in mind that, even if your set it and forget it 401ks from previous employers don’t amount to much on their own, that doesn’t mean you should literally forget about them. You would be surprised how much of a difference consolidating your investment portfolio could make to your returns, especially if that one, consolidated portfolio is managed properly.
The Solution: Tailored 401k Management
Speaking of managing your portfolio properly: although it’s possible to tackle the problems we have highlighted above on your own, we also know that you might not have the time or resources to do so. That’s why we would suggest finding a financial advisor who can actively manage your 401k, and adjust it over time to suit your unique goals.
This proactive, tailored approach can solve the problems we have discussed and could yield great returns that meet your long-term needs — for instance, through regular rebalancing. As we have already mentioned, regular rebalancing ensures your asset allocation remains aligned with your risk tolerance and financial goals. If, say, your goal was to retire in 20 years, rebalancing could help you maintain a suitable mix of growth and income-generating assets throughout that investment window.
Diversification is another critical strategy for active 401k management. By working with an advisor who will help to spread your investments across various asset classes — including stocks, bonds, and real estate — you can mitigate risk and enhance potential returns.
Maintaining diversity in your portfolio over time requires intentionality — something your set it and forget it 401k is almost certainly lacking. By hiring an investment consultant who will ensure your portfolio remains diverse, you can reduce the impact of a poor-performing asset on your overall portfolio, and proceed on a stabler path towards your retirement goals.
What Exactly to Look for in a Financial Advisor
Other than finding a financial professional who can rebalance your portfolio and ensure its diversification over time, what else should you look for? In our opinion, you should look for someone who can offer personalized guidance, help you develop a comprehensive retirement plan, and offer insights that you might not have considered on your own.
Here are some good starter tips for finding that kind of financial advisor:
- Check Their Credentials: Ensure your advisor holds relevant certifications, such as Certified Financial Planner (CFP) or Retirement Income Certified Professional (RICP).
- Understand Their Fee Structure: Financial advisors typically charge fees based on assets under management, hourly rates, or flat fees. Make sure you understand how your advisor is compensated to avoid any conflicts of interest.
- Assess Their Experience: Look for advisors with experience in managing 401k accounts and a proven track record of helping clients achieve their retirement goals. (You could check our advisors’ experience by clicking on the FINRA “BrockerCheck” popup on the bottom right hand of your screen, for example.)
By working with a trusted financial advisor, you can gain confidence in your 401k strategy and make informed decisions that align with your long-term objectives.
The Iron Point Difference
It’s one thing to talk about tailored 401k management, and another to find an adviser whose service actually lives up to that title. That’s where working with a financial planner like Iron Point Financial can add value compared to the competition. To quote Greg,
“We try to do it a little different. Your typical adviser doesn’t want to think outside the box. They’ll just tell you: “Buy this mutual fund.” Everybody gets the same thing. Now, you might have it a tiny bit different from the next person, but that adviser only has twenty funds to choose from in the first place — and how different can they really be?
That’s what we fight against with every part of our being. Is a mutual fund the right solution for some people at some times? Yes. Will we employ that solution if so? yes. But there are so many avenues out there that just take a lot more research and time to understand, once you can grasp them.”
At Iron Point Financial, we don’t just think outside the box, but we make sure that everything we do is connected to your unique goals. That’s why we don’t measure success against some random market index, but against how close you are to achieving your financial dreams. When Greg sits down with clients, it looks a lot like this:
“Here’s my job: my job is never to tell you you can’t do something (unless it’s so obviously unattainable); my job is to figure out how to make it happen for you. I’m not going to rain on your dreams. I’m here to fix problems.
Clients ask: “How do we do it? How do we get ‘there’…?” And I say, “Here’s what we’re going to do. Let’s move these pieces around the chess board, and we’ll figure it out. Let’s construct a bridge to get from point A (where you are now) to point B (where you want to go). We’ve just got to do the math.
When you run the math, there is a clear path to make it to their goals. People will come in and say, “Well, what’s the market doing today? And nine times out of ten, I have no clue, unless I happen to hear it on the radio. I don’t care what the market’s doing today. It’s meaningless. You do more harm chasing that, letting that stress you out, than if you just develop a plan, stick to the plan, work the plan.”
In a sentence: if you work with an investment adviser like Iron Point Financial, we’ll make sure that you don’t fall prey to any of the three main problems associated with your set it and forget it 401k: we’ll keep your portfolio balanced, mathematically realistic, and simple by tying it your unique goals.
Summary Thoughts
Active 401k management is your key to maximizing growth, minimizing risk, and working towards a more secure financial future. By understanding the risks of your set it and forget it 401k approach, leveraging strategies like rebalancing and diversification, and relying on fiduciary investment services, you can optimize your retirement savings.
Millennials in particular have a unique opportunity to take control of their financial destiny by starting early and seeking professional advice when needed. Remember, your 401k is a powerful tool for building wealth — don’t neglect it. Your future self will thank you.
If you enjoyed this article, why not sign up for regular email updates from our blog, so that you don’t miss future posts?
Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have registered broker licenses for 22 other states across the continental USA.
