Is Human Nature Hurting Your 401(k)?

Thank goodness people have emotions, life would be unbearable without them. However, when investing for your financial future emotions can be very costly. We all watch TV, listen to all media sources that are playing on your emotions. You need someone managing your investments and your emotions for you to succeed long term.

Asset Allocation on Wikibook
Asset Allocation on Wikibook (Photo credit: Wikipedia)

Choice conflict leads to choice avoidance. Translated, this means that having too many choices often leads to inaction. This is all too true in the 401(k) world. Many plans offer too many investment choices, leading participants to do nothing. Plan participantsoften feel overwhelmed by having to direct their own investments. Add a large number of choices and you have a formula for inaction. In today’s world, this often means that many participants are defaulted to a target-date fund or some other default option. This may or may not be the appropriate choice for their situation.Inertia is the norm. According to the professor, most employees have the same asset allocation as the day they started work. As an adviser to a number of plans, this has been my experience as well. Participants rarely change their allocations, even as they age. If fund A is replaced in the lineup by fund B, you rarely see money move into or out of the new fund. An allocation that was appropriate at 35 is likely not appropriate for that participant at age 55.

Taking charge of our own retirement savings and investing is a daunting task. If you see the traits outlined above in yourself, consider some ways to take charge of your 401(k) plan:

–Consider using an advice option if offered by your plan. This might be in the form of online advice, via telephone, or in person.

–Managed accounts, which generally allocate the plan’s existing funds into portfolios that fit various levels of risk, are gaining in popularity.

–Engage the services of a financial adviser. A professional should take a broad view of your overall financial situation and advise you on how to invest your 401(k) account as part of that process.

There is a saying about portfolios ‘your portfolio is like a bar of soap the more you touch it the smaller it gets” The opposite is also the case, most employees set it and forget it. 401(k) Plans can become more ‘pension fund like’ and allow investment professionals make the investment decisions for participants and employers.

Please comment or call to discuss how this would affect you and your company sponsored retirement plan.

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