Mark Phelps, CFA, Director of Manager Research – Ameriprise Financial
Over the past three decades, the 401(k) has become a key piece of the retirement savings pie. Outside of the home, a 401(k) may be the largest investment an individual has. When a 401(k) does well, it can significantly contribute to retirement savings, but if a 401(k) does poorly, it can have lasting effects that stretch far into the future.
When preparing your 401(k) for retirement, it’s important to begin saving early and to contribute regularly. But it’s equally important to pick suitable investments that ensure your overall portfolio risk profile is appropriate for your situation.
For many investors, the latter action is easier said than done — especially considering the stock market’s performance in 2021. With stocks rising aggressively last year, it’s understandable that investors may favor equity investments. But stocks present portfolios with greater uncertainty over shorter periods, as we’ve seen thus far in 2022.
With more market volatility likely ahead, here are three steps you can take to prepare your 401(k).
1. Continually review your asset allocation
Begin by looking at your entire retirement portfolio, pulling together your 401(k) assets and other retirement savings to understand the mix of investments in total. This exercise can be done with your financial advisor and should provide a better picture of where you stand rather than looking at each account individually. When the market fluctuates, as it has recently, you may find your portfolio can drift away from your original asset allocation targets and the risk profile that supports your financial goals. By reviewing your portfolio, you may discover that you need to rebalance (which is the strategic movement of assets back to your original allocation amounts) — or you may find that there aren’t any changes needed.
If you’re close to retirement, for example, you won’t want to abandon stocks completely (even though it may be tempting due to the recent volatility). For a retirement portfolio to last decades, it needs an allocation to stocks to provide growth and inflation protection over the long term. Without any exposure to stocks, the portfolio could run out of money by being invested too conservatively. Keep in mind that an investor’s appropriate level of risk should change throughout their life.
2. Check the details of your target date funds
You may be reading this and think that none of this applies to you because you are invested in a target date fund, which is a type of mutual fund built to grow assets over a specific time frame. But target date funds may not be the best solution for your unique financial situation.
While target date funds are often thought of as “set-it-and-forget-it” investment solutions, they are not designed with your personal needs in mind, and there is wide variation in the types of investment options held within each target date fund.
For example, Morningstar’s 2025 target date fund line-up shows that the most conservative 2025 target date fund has approximately 30% invested in stocks, and the most aggressive 2025 target date fund has about 60% in stocks. That is a significant difference in risk, which matters when thinking about withdrawing money and recovering from a market selloff.
3. Meet with your advisor regularly
Because each person’s financial goals, time horizon and risk tolerance vary, it’s important to have a retirement plan tailored to your unique situation. This is where your Ameriprise financial advisor comes in.
A financial advisor can help you evaluate your options to construct a well-balanced asset allocation and then periodically review your retirement account’s investment mix to ensure it’s still aligned with your current situation.
During periods of market volatility, knowing that you have a sound investment strategy and a professional overseeing your portfolio will make it easier for you to stay the course to your financial goals.