What to do with my 401(k)

401(k) practices for plan sponsors and participants during economic uncertainty

The Federal Reserve is trying to tackle high inflation. With interest rates up and stocks taking a battering, how do you manage your 401(k)? These areas can help.

Although inflation is moderating, it is still high compared to recent history. The Federal Reserve continues to tackle high inflation through a process of raising interest rates. Between inflation and the Fed’s response, stocks have taken a battering in 2022. With looming economic uncertainty, how can employees and employers manage their 401(k) plans? They can start by reviewing these three areas.

Reviewing your asset allocation

Asset allocation refers to the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals, and investment time frame. As a market goes up or down, each asset performs differently. Eventually, the portfolio’s intended mix of assets strays away from the original plan and must be rebalanced, or reallocated.

The last three financial years have been very good for specific asset categories, but we are now experiencing a change in trends. As a result, employees’ portfolios may be out-of-balance with their original asset allocation plan. To prepare for economic uncertainty, we suggest reviewing your risk tolerance, goals, and timeframe and then rebalancing your portfolio as needed.

Employers need to make it easy for their employees to assess and modify their asset allocation. Have a tool in place so your participants can easily see the makeup of their portfolio, understand their portfolio’s risk, and see the end of their financial runway.

Software like iJoin will project your participants’ 401(k) and project where they may end up if they stay on their current course. This transparency allows participants to make informed decisions when rebalancing their portfolios along with assessing their contribution rate and the ability to maximize utilization of the employer’s match.

Stay the course

Participants need to stay the course and not panic. Assess your capacity for risk. Risk tolerance is how much investment risk you are willing to take. Risk capacity is how much investment risk you can take on. While an investor may have a high risk tolerance and be willing to take on risky or more volatile assets, if they are paying their mortgage and buying groceries exclusively from the earnings their portfolio generates, they likely have a very small risk capacity.

Consider your current age and the time left until retirement. Take into account any financial obligations or other assets outside of your 401(k). Consider rebalancing your portfolio at least once a year, and do not stray far from your original investment strategy.

Employers should encourage participants to stay the course with their contributions. Increase participation in the plan through immediate eligibility and auto-enrollment at a rate of 3-6%. Educate employees about strategies to manage the risk associated with economic uncertainty and why taking loans from their 401(k) plan is usually not a good idea.

Do not stop putting money into the market

Do not stop putting money into the market. It is a common mistake for those close to retirement to become too conservative. You still have a long way to go to live off your investments. If you are far from retirement, it is essential to start investing as soon as possible.

An example from Vanguard illustrates the power of compounding returns for investors.

Imagine you start saving at age 25 and put away $10,000 a year; including any matching contributions your employer offers. But at age 40, you decide to stop saving. Your colleague starts saving at age 35 and saves the same $10,000 a year for the next 30 years until you both retire.

At that point, all else equal, you will have over $220,000 more than your colleague, despite having put away only half as much.

There is never a perfect time to move money in or out of an investment. Attempting to time the market’s ups and downs with your contributions and investment transfers is rarely successful long-term. Regardless of volatility, it is wise to stick to your plan and continue to invest in your 401(k).

Plan sponsors can help encourage employees to save for retirement by offering matching contributions to their participants. Matching contributions are contributions you make to a participant’s retirement plan account that match the participant’s contribution up to a certain amount.

An employer match is a benefit that can help attract and retain employees in a demanding labor market. It is also a great way to motivate employee participation and set them on the course to success.

Questions?

We suggest employees reassess their asset allocation given the market run-up over the last few years. After making needed changes, employees should stay the course and continue investing in their retirement funds. Plan sponsors should have tools to help plan participants understand what is going on with their retirement account and their path to retirement.

If you would like to learn more about retirement plan best practices and how they can help your organization, contact Brad Bechtel using the information below.

Brad Bechtel

Senior Vice President
Employee Benefit Services

Brad Bechtel leads AGH’s employee benefit services (EBS) division, which serves clients nationwide. EBS is one of the region's largest providers of retirement plan recordkeeping services for daily valuation plans. The division provides consulting services to clients on employee benefit plans, including plan design, implementation, operation, fiduciary due diligence, compliance, and through affiliate AGH Wealth Management, discretionary and non-discretionary investment fiduciary services, investment advisory services and employee education.

Brad is experienced in executive compensation, including non-qualified, phantom stock, top hat and excess benefit plans, as well as other deferred compensation approaches. He has consulted for numerous Fortune 500 corporations on investment management and fiduciary due diligence. He also provides search and selection due diligence consulting services for companies seeking new investment and recordkeeping providers for their qualified plans. Brad is a registered investment advisor who holds Series 7, 24 and 66 FINRA registrations, and he is a member of the American Society of Pension Professionals & Actuaries.

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