When It Comes to Your 401(k), Don’t Just ‘Set It and Forget It’

A few years ago, my 401(k) started to exhibit strange behavior. I check my statement about once a week, and at the time, I noticed that my balance was dipping and rising, and I had no idea why.

Despite personal finance being a hobby of mine, I don’t really follow financial markets, and I don’t put much research into my investments. You could say I’m uninformed by design, my thought being that if I started to educate myself I’d feel just enough hubris to go out and lose all my money. I was, and still am, fairly proud of my current investment strategy: pick a risk profile, invest regularly (and automatically) in diversified, low fee products, and ignore the financial noise.

But my 401(k)’s crazed flight worried me because, like for a lot of people, it’s my best chance at any kind of retirement. So I ran some cursory checks: Was the S&P 500 soiling itself? Nope—the S&P was modestly up. Was the Federal Reserve making some kind of inside baseball moves that I only pretend to understand when I’m drunk at dinner parties? Wrong again.

Then I checked my company stock. The three-month line graph of performance resembled a seesaw ride taken by a particularly sugared up first grader. Running 401(k) statements for different time periods confirmed that my investment in company stock was causing the majority of my investment swings.

See, like a lot of companies, my 401(k) does an employer match. This is the “free money” that everyone says you’re foolish to turn down. And they’re right; never turn down free money. But that’s usually where the advice ends, and I worry about that, because it hides a pernicious fact: lots of companies match in their company’s stock, and in almost every case keeping this stock is a terrible idea. My company does this. All of my matching funds go into something called ESOP, which is nothing more than company stock and some cash holdings. In my case, my company’s difficulties were having an outsized affect on what should have been a fairly safe, long-term retirement nest egg. I rarely speak without caveat, but I’ll say this directly: If you have more than 10 percent of your 401(k) in your company’s stock it’s a problem, and you need to fix it.

There are many reasons for this. The first is diversification. Every sane financial analyst will tell you that a diversified portfolio will protect you from the ups and downs of any one piece of the economy, be that a country, a sector, or a company. Your 401(k) investment options are a buffet of diversified options: most of them contain dozens or even hundreds of individual investments specially picked by fund managers after careful quantitative analysis. Your company stock, on the other hand, is one stock picked by your company because it is your company.

And this company match can grow to be an outsized portion of your total 401(k). By the time I discovered my error, company stock accounted for 30 percent of my total portfolio. This is the equivalent of exempting kitchen fires from your homeowner’s insurance and then cooking exclusively with a turkey fryer.

You might say, “Yeah, but my company is great and I believe in them.” It doesn’t matter what company you work for. It could be Apple. It could be Exxon Mobile. These are the two most profitable companies of the past five years, and it’s still a terrible idea to own their stock equal to 30 percent of your portfolio. I’m now at about 10 percent, but I’m seriously considering 0 percent. It’s just too risky a bet to make with a retirement fund. If you have a “just for fun” investment account, you can invest it all in Apple stock and you’ll hear no complaints from me. Heck, you can invest in lead balloons. Just don’t pretend it’s anything other than a modestly informed bet.

Lastly, imagine a scenario in which your company goes out of business. It might be large and successful, but the field of capitalism is littered with the skeletons of large, successful companies. Obviously, if your company goes out of business, you’re out of a job. Your 401(k), however, is yours to transfer over to your next employer. Which is great news, except that now it’s significantly lighter because your company’s stock just tanked. Much as we’d like it to be otherwise, our jobs already pull the marionette-strings of our financial life, and it’s insane to give it further influence.

Fortunately, it is illegal for a company to force you to keep your company stock. Sometimes there are vesting periods where you don’t fully own your investment for a period of time. And sometimes you can only trade out your company stock quarterly. But in the end, you can transfer it, and you should fight the warm, sleepy embrace of entropy and do so.

As I explained above, I am not an investment expert, and I wouldn’t purport to tell you where to move this money. You need to research your individual plan and make the decision that’s right for your investment strategy (and you should probably dollar cost average, whatever you decide). But the “set it and forget it” philosophy of 401(k) planning should not be synonymous with ignorance of said plan. Our chances of a long, comfortable retirement are slim enough as it is, and we can at least try to mitigate the obvious risks. Let’s put away the turkey fryer, people.


Previously: “Why My Cat Has a Savings Account”

E.A. Mann is an engineer and freelance writer living in Warren, R.I. He has a twitter account, but feels like an old person when he tries to use it. Photo: Kristina Zuidema


27 Comments / Post A Comment

travlinggirl (#4,335)

Thanks for posting about this! I had no idea. I went to go look at my retirement fund for the first time in a while and moved some things around. Also, realized that I had way more money that I thought I had. Crazy.

MargaretMead (#2,229)

Augh. I ran out of money on my flex spending account and have to get a wisdom tooth pulled this week. I don’t have dental insurance through work just basic coverage so I am paying cash to do it at a dentistry school, which is fine, I like contributing to a medical students learning experience yadda yadda.

The problem is figuring out how to pay for it since I’m going in as a cash patient. It occurred to me that I CAN dip in to my 401k to pay for it if I need to. I checked my plan online and it said that I have to do it through my HR manager, and the minimum I can pull out is just enough for the tooth extraction and follow up care. My HR manager told me that each request to disburse from the 401k is personally approved over by the CFO here. My department is always at odds with her, I don’t work with her directly, but I’ve heard through the grapevine she doesn’t like my attitude around the office a lot and I know that she favors staff who she likes more.

In the end I am just putting it on my credit card and paying it off later with some funds from my Ally account but I’m wondering is it fair to have to disclose so much personal information to a non-HR colleague to access my 401k?

Is it fair that 401k disbursements have to be approved on an individual basis by a really not impartial coworker?
That’s not against some workplace law somewhere?

I know it’s just a tooth but it’s nobodys business why my wisdom teeth are still in my head at 29, or why I didn’t sign up for the dental plan (which I can afford now but couldn’t afford a year ago when 2013 registration was open).

@MargaretMead Does the school have payment plans or low interest financing? I had the same problem when I needed a tooth extracted (most insurance companies don’t pay for them because “a bridge is just as good” which, argh, when you’re 24 no it’s not) and the offices were able to offer me a couple different payment options.

Although, admittedly, they were a very very sweet office the likes of whom I have not met in the dental industry before/since, so…YMMV.

MargaretMead (#2,229)

@polka dots vs stripes
I should check, I just want to avoid opening new lines of credit wherever possible. Thanks :)

EA_Mann (#5,000)

@MargaretMead sorry to hear about your issue. 401(k) loans have downsides to them but in most cases would be better than a big credit card bill. I am not an expert in this area, just a hobbyist, but all 401(k)s at companies are administered by an outside company. My company pays ING/Sharebuilder, for example. The process to borrow from your 401(k) should go through your plan provider and not your actual company. I’d download a statement from your provider, find a “contact us” number and give them a call. Even if it’s too late for this to be helpful for your current problem, learning how to use your 401(k) plan could help you down the road.

Non-anonymous (#1,288)

@MargaretMead If it makes you feel any better, I got my wisdom teeth out at 29. You’re not alone!

RocketSurgeon (#747)

This is a helpful post. My husband just started a new job yesterday and is opening his first 401K. His company matches, which is awesome, but I’m glad to know that we should check to see if it’s in stock and make sure the percentage doesn’t get out of hand.

sherlock (#3,599)

That’s crazy! I had no idea this was common practice. You’re totally right that it goes completely against most of the principles of retirement saving.

I would say any amount higher than 0% in your own company’s stock is a mistake. Even if you work for a great-performing company, it’s silly to put all your eggs (income, savings, AND retirement) in that one basket.

Kthompson (#1,858)

This is a very helpful post, really wonderful advice with two great points: Don’t just “set and forget” your 401(k) and diversify away from your company. Think Enron. Those poor shmucks at the ground level were advised to put a majority or all of their retirement in Enron stock because, hey, it can’t lose. Now where are they? That might be an extreme example, but diversifying away from your company is always brilliant advice. Great post!

nell (#4,295)

This is only somewhat related, but does anyone have recommendations on an IRA where you can roll over a small retirement account? (Account I have is not a 401k, it’s a simple IRA and…I am not totally sure of the difference/definitely guilty of “set it and forget it.”) It’s from my first job out of college so it’s much less than the 5k you need to rollover to a lot of the ones I have looked at. I know just leaving it there is an option but I would like to supplement it and keep an eye on it. (rollover’s not an option with set up of my new benefits). Any help appreciated!

EA_Mann (#5,000)

@nell I’ve used vanguard to roll over a roth ira, but they do regular IRAs too. They have a minimum startup of 3k and their fees are about the lowest you’ll find. My only complaint is their web interface isn’t always the slickest, they don’t hold your hand, and getting someone on the phone can take some time. But all of those problems are BECAUSE they want the fees to be low.

nell (#4,295)

@EA_Mann Hmm ok. I had heard Vanguard was a good one, but they say on their site that most of their accounts require 5k to start up. I’ll call them and check it out, obviously there must be other options – thanks for the advice!

hungrybee (#73)

@nell Cosign all the way on Vanguard.

Eric18 (#4,486)

@nell Ditto on Vanguard.

Beaks (#3,488)

@nell Two (okay, three) things:
A) Has it been at least two years since you opened the Simple IRA? Simple IRAs are different from 401ks and other IRA accounts in that you can’t roll it over until you’ve had the account for two years. The IRS has a reasonably helpful page about this somewhere.

B) Vanguard should have funds where you can start with 3K (actually upon further research their Target Retirement funds let you start with 1K). Fidelity and Charles Shwab are also reasonable options.

C)The easiest way to roll over a fund is to make a phone call- a reasonably helpful person will be able to walk you through the process and you won’t have to guess what forms to use. This is especially true for Simple IRAs because they are a bit different than other types of retirement accounts.

Christy (#3,892)

Can we talk about life cycle 401(k)s? My entire goal is to set it and forget it. I work for the federal government, and I’ve just dumped all of my retirement savings into the TSP (govt 401k) that’s designed for people retiring in 2050. (I’m trying to retire in 2053, so it’s right on target.) Is this a feasible strategy? I really don’t want to think about it. (I get a match, but it’s just put into the same TSP fund, so no worries there.)

MargaretMead (#2,229)

@Christy My plan offers a 2040 target date fund but not a 2050 TDF, initially I had it all going in to the 2040 fund but I noticed that TDFs seem pretty conservative with their investments and other funds available on my plan have better performance. So now my contribution is split between the TDF and a more aggressive internationally indexed fund. I’m pretty happy with that setup. The international fund performs much higher on average than the tsp, but is not stable enough for me to feel fine putting ALL my retirement contributions in to it.

Hare meets Tortoise without putting everything in to mid performing funds.

Allison (#4,509)

@Christy ditto, only when I started there wasn’t a 2050, so a bunch of it is in the 2040. Probably I should switch it up some.

EA_Mann (#5,000)

@Christy Since I wrote the article I have to be cautious and again say that I’m not an expert. But if you have TSP you’re already ahead of the game because your fees are low and you have the same basic product as members of congress (read: not likely to be gutted).

My article was about matching funds going into company stock, so if your match goes back into your investments then you are not at risk for what I was talking about. Beyond that you should check your target retirement fund against other indicators. Since 2040 is a while away, the investment should be pretty aggressive. How has it done in the last 5 years versus the S&P 500? S&P has soared, so if your account has done poorly as compared to that, it might not be aggressive enough.

I personally have a percentage in the target fund and percentages in a bunch of other investments. A target fund is diversified, but that diversity itself is selected by a fund manager from one company. So I like to spread it around to further lessen risk. Instead of ‘set it and forget it’ maybe you can shoot for ‘set it and forget it except once a year’ or ‘set it and eventually when it gets really big pay someone to manage it for you’. Hope this was somewhat helpful and not just confusing.

OhMarie (#299)

@Christy I do this (with Fidelity’s 2050 fund). I hemmed and hawed a bit but decided that ultimately, whoever runs the 2050 fund would be more fucked than I would if the thing tanks.

pizza (#599)

@Christy You’re totally fine. A life cycle is diverse and they will reinvest as time goes on to buy make it less risky as time goes on. This is the one time when you can set it and forget it!

VelourFog (#5,077)

@Christy I talked to the IRA manager from my previous job when I wanted to roll that money I to my govt employee TSP. He told me that the retirement year options were the worst funds because it doesn’t give you any control. I split mine between G C and S funds I think and just check the website every few months to see if I want to adjust. As you get closer to retirement you will want more of your money in the less g funds, but if you are young you’ll want a better return for the majority of your money.

pizza (#599)

@VelourFog Life cycle funds reallocate based on your age. That is why there is a target retirement year. Assuming “g funds” are most likely bond funds then yes they do that for you automatically. You can also always exchange your shares into a life fund and reallocate yourself. It’s not a life commitment! IF you google life cycle funds, I guarantee the majority of finance writers are for them. It’s only good to not use one if you like tinkering and will actively watch it—which could save a little money on fees. However, lifecycle funds can have very low fees—Vanguard fees are 0.18 for life cycle.

Allison (#4,509)

@VelourFog I think you might want to watch the little animation here, because what you described is exactly what happens within the fund. https://www.tsp.gov/investmentfunds/lfundsheet/fundPerformance_L2050.shtml

Not commenting on the advice. But I do want to say this was a most excellent line: “This is the equivalent of exempting kitchen fires from your homeowner’s insurance and then cooking exclusively with a turkey fryer.”

Also, re-balancing your 401k every 6 months or so will help to keep your money growing at good rates within the categories you’ve set up.

For me, in December and July, I rebalance so that I have the same ratio of high-risk to low risk that I want to grow correctly for my retirement age. (I think I have about 70% high to 30% low at age 29.) As the high risk part grows, it can get up to 85% high risk depending on how the markets are doing with those funds. As I get older, I’ll change to a higher % of lower-risk funds.

And, my portfolio will re-balance automatically for me on that schedule and just send me a notification that it’s done.

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