Avoid This 401(k) Trap

Picking several different stock funds is not diversification

By SHARE

The average 401(k) plan offers 18 investment choices. The top three most commonly offered options are actively managed domestic equity funds (77 percent of plans), actively managed international equity funds (73 percent), and indexed domestic equity funds (70 percent), according to the Profit Sharing/401(k) Council of America. These are also the funds employees choose most frequently to invest in.

But blindly picking a few different stock funds isn’t diversification. Jonathan Pond, a financial planner and author of Safe Money in Tough Times: Everything You Need to Know to Survive the Financial Crisis, says that many people are unwittingly overloading on stocks in their 401(k) plans. “Many plan participants spread their money among a variety of funds in the plan, thinking they're well diversified, but they end up with far too much money invested in stocks,” he says.

Employees should pay attention to how their money is allocated between stock and bond, money market, and stable value fund choices. “Simply putting money blindly into a bunch of stock funds could result in further big losses if the stock market continues to stumble,” cautions Pond.