Real 401(k) advice from an investor you can actually understand.
The recent Wall Street roller coaster should be a wakeup call for those counting on their 401(k) for retirement funds.
A recent Charles Schwab survey says that only 58 percent know how much they should save for a comfortable retirement. And they know even less about how their 401(k) plans actually work.
And all of this is contributing to why they don't save for retirement.
"It's that tension between how do I enjoy today but understand I also have to prepare for retirement," says Catherine Golladay, vice president of participant services and administration at Schwab Retirement Plan Services.
Maybe this explains the confusion: Some 47 percent said that materials explaining their plans are harder to understand than those explaining their medical benefits, according to the survey of 1,000 workers with 401(k) plans.
"Given what's going on the market, it's time you want to remind people that panic is not a strategy and your best bet is to focus on asset allocation, diversification and rebalancing," Golladay says. "You don't want to fall into the trap of emotional decision making."
Golladay says the best financial plan is one that looks at financial and emotional risk tolerance, and your time horizon to retirement are going to weigh into how you create your portfolio of what your asset allocation is in the stock market.
And to enjoy that prime plan, head to a professional. (In fact, without professional help, many baby boomers actually over-diversify.)
"That brings it back to advice," Golladay says. "For so many people, it's difficult to make those decisions, and professional advice will tell you what you should be saving and how to invest it and what that looks like in retirement in terms of a monthly paycheck. The findings of what we see in terms of how people take advantage of that is they are better diversified, they save more, and they stay the course during volatile market times. It packages things up together, helps the person overcome inertia, and really focus on positive outcomes."
Golladay says it's difficult to give broad advice for a diversification investment strategy - but there is one everyone should use.
"If I point out one nugget, it's that we look at people who are invested in one security, often employer stock," Golladay says. "If you have people who work in a company and are invested in their employer, you never want to be higher than 20 percent. Look at concentrated positions and what's the risk there. Diversification is going to be investments over a broad category of assets."
Golladay says that about three in 10 have either decreased or not made any changes to their 401(k) savings rate in the last two years - even though people should rebalance their 401(k)s at least once a year. She says you could even do it every six months, depending on what the market has done.
"What you want to do is bring it back to that asset allocation strategy you set out for," Golladay says. "If the market has done well in a particular area and you find one of your assets has grown and is a higher percentage then your original plan, you want to bring it back into balance with a regular plan."
Many employers are designing their 401(k) plans to better address savings obstacles and to help their employees take more control of their investments. They are using automatic enrollment, automatic savings rate increases, and automatic investment advice to help their employees prepare for retirement. That focus will only help improve outcomes, she says. Some 73 percent said they're confident they would make the right investment decision with the help of a professional, yet only 12 percent are getting that advice. Only 44 percent feel confident in doing that on their own.
There's opportunity for growth because 67 percent want that personalized 401(k) advice, and 79 percent said they're likely to see out that professional help.
"Most participants want 401(k) advice, but whether because of inertia or discomfort, many don't take that first step of asking for help," Golladay says. "We've observed that when advice is built into the plan so that participants start off with it and are free to opt out if they wish, nearly 86% stick with it. That can make a big difference."