Is Your 401(k) Too Conservative? Too Aggressive? Here’s How to Tell and Fix

With market volatility picking up in recent weeks and likely to continue through the uncertainty of the presidential transition, retirement savers may want to look away. But for investors who take a peek at their account statements and don’t like what they see, it likely has to do with allocations that […]

With market volatility picking up in recent weeks and likely to continue through the uncertainty of the presidential transition, retirement savers may want to look away. But for investors who take a peek at their account statements and don’t like what they see, it likely has to do with allocations that are out of whack. 

How a retirement saver sets asset allocations is a reflection of personal risk tolerance and investing time frame, but there are a few universal truths. A portfolio with too conservative a mix won’t grow fast enough to outpace inflation and taxes. A portfolio that’s too aggressive is subject to significant volatility that may make it difficult to recoup losses at critical times. Either extreme puts investors at risk of not meeting their retirement goals.

So how can people saving for, and in, retirement know their mix is the right one? Here are a few tips.

What’s Too Conservative?

A moderate-risk portfolio of around 70% stocks and 30% bonds will mirror the broader trend in stocks, says Gerald Baker III, a financial advisor at Equitable Advisors. If the stock market is up on any given day, an investor’s portfolio should rise. “If not, there’s something wrong with the mix,” he says.

Money can be sometimes trapped in money-market accounts. This can happen if workers are auto-enrolled in a 401(k) that allocates funds to a money-market account until the person selects investments, Baker says. It’s why savers should review what they’re holding and where new money is allocated, he adds.

A sluggish portfolio might also have too many bonds, says James Royal, an analyst at Although the 2020 stock market has fluctuated significantly, Royal says if a 401(k) investor doesn’t see market-matching portfolio growth in 12 to 18 months, a heavy bond allocation is the likely culprit.

Royal says investors younger than 45 should err heavily to the side of stocks, and perhaps have no bonds, since they’re not likely to tap that money for 20 years or more and can ride out stock fluctuations. People who are five to seven years from retirement can start adding small amounts of bonds as a ballast to equity volatility, depending on risk tolerance.

People who use target-date funds may also have to adjust their portfolios now that interest rates are so low, says Bryan Green, partner and founder at investment advisory 6 Meridian.

Target-date funds automatically rebalance stock and bond allocations annually based on a person’s age or retirement date. Depending on the target-date fund’s asset allocation, there likely will be heavier bond allocations for people closer to retirement.

If the target-date fund follows something close to the old rule thumb to use 100 minus a person’s age to set the stock weighting, meaning a 30-year-old would have 70% of their 401(k) in equities and a 50-year-old would be split between stocks and bonds, that is now too conservative, Green and Royal say.

Savers can force bigger equity holdings in target-date funds by cutting off at least 10 years from their chronological age, that is a 40-year-old should set their age at 30 to boost the stock allocation. For target-date funds that use a retirement age to determine allocations, savers should input a retirement age of at least 75 instead of 65 to get a higher stock allocation.

What’s Too Aggressive?

People who are a year or two from retirement need to mind account volatility. Portfolio swings of 10% or greater in a month is too much since these savers have less time to recoup steep losses, Royal says. “What you absolutely want to avoid is taking a 30% or 40% hit the year before you need to tap your money,” he says.

The proper stock-bond allocation for a person near retirement depends on his or her goals and the necessary return to reach those goals, Green says. Often when he looks at 401(k) holdings for near-retirees, they are overweight high-growth sectors such as small-cap and emerging-market equities. That happens if the person got asset allocation advice and never changed the mix over the years.

Rebalancing is the easy fix there, and he says often people didn’t realize allocations were off. “In some ways, those conversations are easier to have, convincing someone to take less risk than more risk,” he says.

Savers with a year before retirement who want to keep high equity allocations could leave their current allocations unchanged but earmark new money for cash holdings in the 401(k) as a safety net, Royal says. “You want to make sure you have cash for whatever reason that you may need it. Keeping it in the 401(k) means you still get the tax shelter,” he says.

Younger investors who get queasy over market swoons may think their 401(k) is too aggressive but need to remember this is a long-term holding, Baker says. He tries to set expectations by explaining to nervous clients that a market creates an average returns because prices rise and fall. “This way, when they do see some dips in their portfolio, they’re not panicking and trying to go to cash,” he says.

Green seeks to reassure clients by revisiting long-term goals and showing their progress toward those goals. But if the person is still fretting, Green may readjust some of the portfolio to incorporate less-volatile investments like dividend-paying funds rather than get out of stocks altogether. It’s a balancing act between emotions and economics, he says, and the bottom line is to keep people in the market for the long term.

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