How should I manage the investments in my 401(k)?
Having a 401(k) retirement fund has over the last couple decades become the standard in many social groups. The era of hoping to retire and live well on a government pension is over, with many people doubting social security will even be around in a few decades, so the practice of planning for your own future has taken on.
Yet, as common as mention of 401(k) funds is, many people remain in the dark about how they work. It’s not only people who don’t have them, either – many people have them but don’t really know how to manage them.
As it happens, you can manage your 401(k) in a myriad of ways, with investments ranging from relatively safe to relatively risky (very risky investments aren’t part of this, because no serious 401k management firm will ever offer you such things.) Regardless of where you’re keeping it, or who its custodian is, you still have options and you’d do well to know them.
The easy path: Let the fund manage itself, by default
You can have a 401(k) and not do much to manage it, but that doesn’t mean it isn’t being managed and your money isn’t being invested.
When you first signed up with a financial institution for your 401(k), the process included a contract – and that contract described, among others, the default investment procedure for that firm. In general, hands-off 401(k) funds are handled in low-risk manners to ensure the integrity of your savings. This includes the safest possible investments, investing in many (as opposed to few) things, and even keeping a good portion of your funds liquid.
It is safe, it requires no input from you, and it’s also boring. So there are other ways.
The less easy, but still easy: Choose an alternate package
As mentioned above, you are shown a list of possible packages when you first hire a firm to manage your 401(k). Rather than going entirely hands-off, you can ask your fund manager or even investigate yourself to try and find the best plan for you.
This can be seen as a little bit riskier, since choices will be made to fit your plan rather than to minimize risk. However, even alternate plans are generally made to be low-risk themselves, so they’re safe enough you shouldn’t have to worry much about it.
You can even change packages after opening the funds, which is common when new markets open or different sectors of the economy grow. If you have doubts as to whether your investments in your 401(k) are being put in markets you believe to be better, ask your fund manager.
Also, listen to them. They might tell you a market is too risky, and if so, you shouldn’t ignore the warning. Unless you really know what you’re doing, chances are they know better.
The intermediate one: Choose what’s invested where
For micromanagers, many financial institutions offer packages that let customers decide how much of their retirement savings is put where. This allows people intent on maximizing their earnings do so while taking relatively calculated risks from a given set of options.
Yes, from a given set of options. Financial institutions dealing with retirement funds always try to minimize the chances of a customer losing their savings to avoid potential PR disasters and legal liabilities. As such, you won’t be allowed to put your money just anywhere, but you’ll be given many possible options. On top of this, you’ll be given financial advice every step of the way, so you won’t be alone.
This model will allow you to make your 401(k) perform better, but while still staying between parameters and limits set by your fund managers. In many occasions you’ll be offered markets, rather than specific companies, with the fund manager deciding how to handle specifics inside each market.
The hard mode: A self-managed 401(k)
For people who still want more, some management companies offer self-managed 401(k) accounts. These accounts do let you choose where to put your money, and they give you a much wider array than plan-based or generalized funds. In these you can decide where to put your money, and when to jump in or out of a market.
The downside is that you’ll need to spend many hours doing research, you’ll face a much higher risk, and your fees will be higher too. On the other hand, if properly managed you’ll likely make much more money this way.
As with the above option, you can’t just put your money anywhere when self-managing a 401(k). The decision on where you can invest will still be made by your fund manager, but you’ll get a much wider array of options and will be allowed to micromanage it.
The expert mode: Drop the 401(k). Go with an IRA instead.
You got me, this one isn’t a 401(k) at all. However, if you’re completely convinced that you want to handle each and every detail of your retirement fund, you’ll have to go solo.
Now, unlike all above options, this one is by far the riskiest. In this case, you’ll have full control on where to invest and how much, as long as your investments follow legal parameters set by the government for IRAs. You’ll essentially have access to most of the market, or at least most of the market people might want to invest in.
The details on how IRAs are handled and what’s needed are long and complex, so we’ll be looking at them soon in a separate post. In general, however, IRAs should only be considered by those who know what they’re doing, and who have extensive experience dealing with the stock and values markets.