Most of us are aware of the importance of saving for retirement, and for American workers, one of the ways to achieve this goal is through a company-sponsored retirement plan. It’s an excellent benefit for employees, but do you know how your retirement investments are being managed?

Your retirement savings account is a significant investment and understanding how its investment options are managed can help ensure you’re on the right path to reach your financial goals. In this blog post, we will discuss the different investment management strategies that may be available within your plan and how they work. It’s important to note, that different organizations will likely have a unique set of investment options, so keep that in mind as you read through.

The Basics of 401(k) Investments

The options and rules surrounding retirement accounts can be confusing. One key area to understand is the different types of investments available. Your retirement plan (401(k)/403(b)) will provide you with a list of mutual funds to select from.

What are mutual funds? Unlike a brokerage account where you can pick and choose individual stocks and bonds, the mutual funds available in your retirement plan are a group of investments bundled into one.

Mutual funds are divided into groups called asset classes. A mutual fund’s stated asset class determines the type of investments within the fund and its overall objective. They can be made up of stocks, bonds, or even a combination of the two. For example, a “Large Cap Growth” fund would primarily include investments from larger, well-established companies like Apple, Amazon, and Google/Alphabet – companies with large amounts of capital within your plan, you may have the option to invest in actively managed mutual funds or passive/index mutual funds – more on these below!

Many retirement plans also offer the option to invest in Target Date Funds (TDF). These investments are designed to be a one-stop shop for your investment strategy within the plan. Each fund is associated with a specific year (such as 2025, 2030, 2035, etc.) and employees select the fund with the year closest to when they plan to retire. Over time, the fund will automatically adjust its investment mix to an appropriate combination of stocks and bonds based on the retirement year they are targeting. The further away from retirement, the more heavily the fund will invest in stocks, and the closer to retirement, the more heavily it will invest in bonds. One benefit of a TDF is that a professional is managing your investments for you.

The Role of Investment Managers

Investment managers play a crucial role in running the mutual funds available within your retirement plan. These investment managers work for fund management companies like BlackRock, Vanguard, Fidelity, et cetera - these are some of the largest investment managers in the industry. They conduct research, analyze market trends, and make informed investment decisions when overseeing their funds. These knowledgeable experts can significantly influence the performance of your investments.

Active vs. Passive Management: Which is Better for Your 401(k)?

When it comes to managing your investments, it's important to understand the different approaches available to you. One such approach is active management, where investment professionals actively make decisions and adjust portfolios in an effort to outperform the market.

On the other hand, passive management involves tracking a specific market index and making minimal adjustments. A passive fund’s goal is to keep pace with the market. Both approaches have their merits, but it's crucial to consider your own investment goals, risk tolerance, and time horizon when deciding which strategy is best for your 401(k).

While active management may seem appealing during times of market volatility, research has shown that passive management often outperforms active management over the long term. Ultimately, the choice between active and passive management comes down to your individual preferences and investment philosophy.

Not sure which strategy to pick? You may also want to see if your plan offers a target date fund or TDF. Target Date funds are designed to make investing easier for people who do not have the time, resources, or inclination to actively manage their retirement accounts and want a do-it-for-me solution.

Understand the Fees

It's essential to know about the fees that come with your 401(k) investments. Every retirement plan has costs associated with it. These costs are broken into several categories – fees paid to investment providers for managing the funds in your plan, fees to your plan vendor (where your account is held) for general plan administration and record-keeping, and if applicable, fees to an independent third party advisor for providing support and guidance to your company and their Retirement Committee.

One of your employer’s core fiduciary duties when offering a retirement plan to you is to regularly analyze and benchmark the costs associated with the plan.

You can see any fees listed in your plan disclosures, so you know exactly how much everything costs you. Your employer provides annual disclosure statements that highlight the information about your 401(k) plan's fees.

The Importance of Diversification in 401(k) Investments

One of the primary benefits of a 401(k) plan is being able to diversify your portfolio with a range of investment choices. When it comes to investing, diversification is key to reducing risk and increasing returns. You can diversify your portfolio by allocating your contributions among different asset classes like stocks, bonds, and others.

By diversifying, you reduce the risk of having all your eggs in one basket, as different investments tend to perform differently in various market conditions. This means that if one investment underperforms, others may still perform well, helping to mitigate losses. Diversification also allows you to take advantage of various growth opportunities, as different sectors and regions may experience different levels of economic growth. Common diversification strategies include investing in a mix of large-cap and small-cap stocks, domestic and international stocks, and a combination of growth and value stocks.

Additionally, diversifying across different asset classes, such as bonds and cash, can provide stability and income during market downturns. By diversifying your 401(k) investments, you can mitigate risk and instead, focus on the benefits of diversification and make informed decisions to secure your financial future.

The Risks of Not Diversifying

If you don't diversify your investments, you might be setting yourself up for consequences that can seriously hurt your overall investment performance. When your portfolio isn't diversified, it becomes too fixated on one thing, which makes it jumpier when markets change, or economic times get rough. This lack of diversification can result in major losses and fewer opportunities for growth.

Monitoring and Evaluating Your 401(k) Investments Performance

By monitoring your investments, you can assess how well they are performing and make necessary adjustments to your portfolio. Performance metrics such as return on investment (ROI), annualized return, and risk-adjusted return can provide valuable insights into the profitability and riskiness of your investments. Thankfully, there are various tools and resources available that can help you effectively monitor your investments. Online platforms, financial apps, and investment tracking software provide real-time updates and comprehensive analytics to help you stay on top of your portfolio's performance.

By utilizing these tools, you can make well-informed investment decisions and increase your chances of achieving long-term success. But don’t overdo it with tracking your investments, we’d recommend only looking at these once to twice a year. Looking at them too much will likely cause unnecessary stress, especially in a more volatile market.

Rebalancing Your Portfolio

Rebalancing your portfolio is a crucial component of successful investing, regardless of the state of the financial markets. Taking a systematic approach to portfolio rebalancing can lead to better long-term results. But what exactly is portfolio rebalancing? It's the process of realigning your investments to maintain your desired asset allocation. This means periodically adjusting your portfolio to ensure that you have the right mix of stocks, bonds, and other assets based on your risk tolerance and investment goals.

Rebalancing becomes especially important in a 401(k) account, where your investments may be automatically allocated based on your chosen contribution levels. By annually reviewing and adjusting your 401(k) investments, you can ensure that your portfolio remains in line with your objectives. The benefits of maintaining a balanced portfolio are numerous. A balanced portfolio helps mitigate risk by spreading your investments across different asset classes. It also allows you to take advantage of market opportunities by buying low and selling high. Additionally, rebalancing forces you to regularly review your investments and consider any changes in your financial situation or goals. Target Date Funds are rebalanced automatically.

Working with a Financial Advisor for Your 401(k) Investments

When navigating the complex world of financial markets, it's vital to have the guidance and expertise of a trusted financial advisor. Finding the right advisor can make all the difference in achieving your investment goals and securing a comfortable financial future. There are several key factors to consider when selecting a financial advisor.

First and foremost, it's important to look for credentials and certifications that demonstrate their knowledge and expertise in the field. Certifications such as a CERTIFIED FINANCIAL PLANNER™ professional or Chartered Financial Analyst (CFA) indicate that the advisor has undergone rigorous training and has a deep understanding of financial planning and investment strategies.

When it comes to financial advisors, transparency and trust cannot be stressed enough It's crucial to have open and honest communication, where your advisor tells you everything about fees, investment strategies, and any potential conflicts of interest. Trust forms the foundation of a successful advisor-client relationship, so make sure to work with someone who genuinely has your best interests at heart. By considering these factors carefully, you'll find the right financial advisor who'll guide you toward financial success.

Taking control of your portfolio and understanding how your investments are managed is crucial to reaching your retirement and financial goals. We hope these tips help you make informed decisions about your 401(k) investments. Remember, it's never too early or too late to start saving for retirement – your future self will definitely thank you.


Disclosure: Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.