Top 5 401K Limitations
401k plans offer a great opportunity to employees to defer a portion of their income and in many cases enjoy a company match. The convenience of the payroll deduction and the company contribution makes the 401k an important investment for most everyone's long-term savings program, however, there are limitations and shortcomings that you need to understand. These include:
#1 Limited investment options
20 to 30 investments vs a possible 18,000 – and some may prefer fewer options.
In our experience, many employers offered 401K plans have somewhere between 20 to 30 funds in which to invest. That may seem like a good selection of investment options, however, there are approximately 18,000 funds that are available to the public.
#2 Varying quality among available investment options
A top-ranked fund this year is generally not a top fund a year later – declining performance may reduce investment growth
401K plan administrators typically select good funds for their plans. However, a top-ranked fund (based on the funds returns) one year may not be a top-ranked fund the following year. Lower returns hurt account growth.
#3 Investment offerings may be updated rarely
Plan administrators generally do not update or change the funds they offer in their plan very often – plans find that changing investment options too often can
be disruptive to their employees.
When plan administrators do make fund changes, they can get backlash from the employees. One potential reason for this is that the employees become frustrated that they have to choose from the new funds. That frustration may come from not knowing where to acquire good, objective fund information and not knowing the difference between the old and new fund. This makes the decision a challenging and stressful one for most employees.
#4 Holding Money vs Managing Money
The economy, politics, tax laws, & interest rates are changing all the time & all of them have an impact on the investment markets. There are times to be more optimistic & times to be more defensive. There is a difference between Holding your money and Managing your money. There are those that prefer a simple buy-and-hold strategy.
As most people know, things are always changing and are constantly impacting the markets. At times there are opportunities to be more optimistic and times that being more defensive is prudent. Often people want someone to truly manage their portfolio.
#5 On Your Own
Some people enjoy managing their own portfolios – others mistakenly do the wrong thing at the wrong time. Risk comes from not knowing what we are doing.
As an employee nears retirement they quite often will make a gradual shift of their 401k investment to a more conservative position-sometimes into a mid-term or long-term bond fund. While this can be appropriate, they can lose money when (if) the Federal Reserve raises interest rates as seen in 2018. The result is that the soon-to-be-retired employee is shocked to see their conservative investment losing money. This loss could have potentially been avoided by consulting with a qualified professional.
Strategies for Some
'If you fall into one of the following scenarios, you have options Prior 401k Plan/Pension/Profit Sharing/Money Purchase 59 72 or older & still working Retired (even if less than 5942)
Options
A true managed IRA account with an Advisor. An experienced professional financial advisor can provide options to address the limitations outlined above.
- Access to Most All 18,000 Funds offered - VS - 20 or 30 funds
- Access to Top Ranked Funds - VS - less than ideal funds
- Active - VS - passive money management Professional
- Advice - vs - an approach of your own
Get Started
Contact us at First Wealth Financial Group to learn more about our managed investment accounts!
No strategy assures success or protects against loss, Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Investing in mutual funds involves risk, including possible loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Contributions to traditional IRA may be tax deductible in contribution year, with current income tax due to withdrawal. Withdrawals prior to age 59 12 may result in 10% IRS penalty tax in addition to current income tax. Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners and First Wealth Financial Group are separate entities from LPL Financial.