The Importance of Diversifying Your 401K
A friend and I were recently discussing our 401Ks. He said he still had all or most (90%) of his 401K in his company’s stock. I was shocked. I said I have one word for you, “Enron”. What goes up quickly can go down even faster. I reminded him of how many Enron employees, individual investors, and even large brokerage companies lost substantial amounts of money.
Before Enron happened the only way my company would match what I put into my 401K (up to 3%) was in the company stock. We were not diversified at all and approximately 90% to 95% was in the company stock. We got an education quick when we heard about Enron. We read a lot about diversification and asset allocation. Then we went about diversifying our 401K. We transferred a set amount every month for one year until we were down to 10% in company stock. We are currently at 5%. Our company gave better investment options and then started matching my 401K in each investment I had instead of just company stock.
it’s a matter of getting HR to enhance the plans by adding additional investment choices with a selection of mutual funds.
but what happens next is that what is offered isn’t what the employee wants. very often the employee wants something that isn’t offered. namely some unusual fund that may have performed well last year. they never realize that the past performance does not guarantee future performance.
then the employees and HR have a new headache with the selection among the typical dozen choices. HR generally cannot advise which funds to select. which leads to professional advisors. the fee only advisors are unbiased in their recommendations. commissioned advisors may have their advice unbiased.
in the end, its the employees that need to educate themselves with the information available to them to make their selections. everyone will have a different investment setup.