Why workers are botching their 401k investments


Jack Van Derhei, who is a research director at ERBI (Emplyee Benefit Research Institute says, “The big risk is that they end up with a nest egg that’s far short of where it needs to be to fund their retirement.” This is a worrying fact, seeing as 61% of people say their 401k is the only financial support they plan on falling back on.

It’s undeniable that the 401k is the best way for workers to put money aside for when they retire. The tax rates are unbeatable and with the employee match scheme you can earn straight away. In 2014 workers can put aside up to $17,500 for their 401k.  If you are aged over 50, you can add a further $5,500 to this.

The biggest problem with people investing in a 401k is they are solely responsible for their own investment choices. Van Derhei says workers unfamiliar with general investment methods don’t have an asset allocation that is co-ordinated towards their age and putting too much of their 401k into company stock.

Robyn Credico, who is a senior retirement consultant at Towers Watson, says, “We all know that there’s a problem [with employee confusion about 401ks] but fixing the problem is an issue… Most employers feel that they’re giving people the tools, but the employees aren’t using them.”

There are some surprising statistics on investment advice provided by companies. A study performed by the Society for Human Resource Management found 55% of employers gave advice online, 44% offered opportunities of one on one advice and 41% gave group sessions for help with your 401k.

You should not hesitate in accepting such help from your employer. Schwab’s survey claims your confidence will nearly double after you have received the help of a financial professional.

Index funds usually have cheaper and safer funds than others that are atively managed. You can then use Morningstar.com to find the expense ratio of your funds. If you are using stock funds, a ratio of expenses that’s below 1 is ideal. Michael Kimmel, a wealth manager from WealthStream Advisors confirmed this and stated “The underlying costs are really important… People don’t realize that they’re paying money to the mutual fund companies, because it just comes out of their returns. But with high expenses, that’s just one more hurdle to clear when it comes to returns.”

Although it is important where you are investing, t5he main factor in your 401k is the amount you are saving into it. Of the people Schwab surveyed, more than half of them improved their rate of saving and 70% of people say their 401k is in the best condition it’s ever been in.

Van Derhei says, “There are a lot of people out there who think they are a heck of a lot richer than they really are.”