When it comes to investing for retirement, the best advice is often not to focus on the day-to-day blips of the market.
U.S. savers, however, have taken that idea too far. Instead of avoiding daily monitoring of plans, many Americans are ignoring their savings — or don’t even have a strategy. According to a recent survey from Voya Financial, 80 percent of those with retirement plans have avoided reviewing or making any changes over the past year. That’s compared to 43 percent of the respondents making changes to a phone, cable or internet plan.
“What we see a lot of times on the retirement plan [is that] they’re fearful of the outcome,” says Greg Palacorolla, a financial planner at Geier Asset Management in Marriottsville, Maryland.
[See: 9 Psychological Biases That Hurt Investors.]
Whether it’s fear, a lack of knowledge or concern, U.S. savers avoid checking their plans to an extreme. The Voya survey found that nearly 40 percent of respondents would rather renew their driver’s licenses than review their 401(k).
But this avoidance can lead to long-term threats that can hurt or even cripple one’s retirement.
Avoidance creates many dangers to the plan. The fear of doing something wrong can often overtake the fear of doing nothing. That’s why it’s easy to see why something like retirement planning gets the short end of the stick. But leaving the plan untouched can be just as disastrous.
Stephen Korving, a financial planner at Korving & Company in Suffolk, Virginia, says he had clients who asked him in the aftermath of the Great Recession why their funds performed worse than the market.
He says in the buildup before the recession, some of the clients’ specialty investments, like health care-focused funds, did really well. But because the clients didn’t pay attention to their accounts, “too big of a portion of the overall portfolio” had become over-allocated into those specialty funds. This gave them less exposure to the broader market.
Rebalancing once a year, ensuring the majority of the plan is in low-cost index funds, will protect from the higher fees and volatility seen in other investment vehicles. Also, looking for a target-date fund, which matches the allocation to the year one expects to retire, will guarantee rebalancing takes place.
[See: 6 Strategies To Avoid Working in Retirement.]
The fear of knowing where one stands. Palacorolla recalls a couple who was few years away from retirement. They both worked for the same organization for a several years and had savings, but they didn’t pay attention to their portfolio. They had never gone through the process to actually determine what they would need for retirement.
A thorough review showed them they weren’t on track. Palacorolla says they learned they needed to cut back on expenses and work a couple extra years in order to reach their retirement goals.
Only 22 percent of 50-year-olds are on track to retire comfortably, according to GoBankingRates.com, so it’s important to know where one stands, especially when nearing retirement. At 50, an investor can take advantage of catch-up contributions, increasing the amount one can save each year in the 401(k), to get back on track.
But if you don’t look at your portfolio, you’ll never know how you stack up — until it’s too late.
There are many options — and some with high fees. Check the fund options and fees before selecting a plan within the 401(k).
First, look at what the different fund options are made of. Whether it’s a U.S. index fund or a global actively managed one, make sure it’s diversified. If it’s a global fund, or a sector-focused one like health care or real estate, then ensure only a limited amount of your portfolio goes into it. These types of funds come with more risk, which means more volatility. While they can serve a purpose in the retirement plan, having a large allocation to these types of investments could leave an investor short as retirement approaches.
“The downside to a 401(k) is the lack of investment options,” Palacorolla says. “Making the correct selections in the limited scope is very important.”
While Palacorolla suggests having a mix of active and passive funds, this strategy will increase the fee exposure and drain your account. That’s the second thing to look for when evaluating the 401(k) strategy — finding funds with low fees.
“If you don’t understand it to begin with, don’t let it frighten you,” Korving says. “Sit down and try to get through it.”
[See: 13 Tips for Singles Nearing Retirement.]
And if that doesn’t work, find someone — either an advisor or the plan sponsor — to help.
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3 Reasons Why You Should Review Your Retirement Plan originally appeared on usnews.com
