Most of us lead busy lives that leave little time to review investments regularly. For 401(k) investors this means losing track of investments. Uncertainty about the investments often leads investors to do nothing. Inaction leads to poor performance either through investment losses or the opportunity cost of remaining in laggard investments. Let’s discuss some of the common pitfalls 401(k) investors face. The biggest risk of falling into any of these pitfalls is poor performance. This article looks at some 401(k) solutions and issues to consider. Pitfall #1: Falling Into the No Time Continuum    Pitfall #2: Holding Onto Laggards Falling into the No Time Continuum is one way investors find themselves holding onto losing investments. However, there are other ways they get there. Converting a losing investment into a long-term position. When an investment becomes a money loser, the investor’s psychology can change. Not wanting to admit a mistake, he or she stays in the investment. Justification often includes: “I’m in it for the long haul.” “I’ll sell when I make my money back.” “It’s only a loss on paper.” In reality, the market does not care about the price at which an investor purchased an investment and feels no obligation to bring the investment back to that price. Averaging Down. The issues of “I’m in it for the long haul” can be compounded by a tendency to average down. For the 401(k) investor, averaging down means continuing regular contributions into a losing investment; the rationale is to buy more shares at a cheaper price to reap rewards if the investment comes back. Averaging down can be unhealthy for a 401(k) by weighting a portfolio with underperforming investments. Making Friends With Your Funds. Investors commonly become emotionally involved with their investments. With company stock they may feel loyalty, so they risk a large portion of their hard-earned money to “support” it. Or the investment could be a mutual fund like Fidelity Magellan where they made money on it in the past, but the fund hasn’t kept up its end of the “friendship” in recent years. The investment has been a loser for the investor, but the investor feels emotionally attached. Essentially investors treat their investments like people who deserve their loyalty. Pitfall #3: Making Your 401(k) Your Only Investment Account The deficiency of many 401(k) plans is limited investment options, which present performance and diversification issues. Investors can use a threshold of 20 options to grade their 401(k). 401(k) plans with over 20 investment selections start to provide the broad menu of choices investors should expect. 401(k) accounts are sometimes funded at the expense of other types of accounts an investor could use to build a properly structured portfolio aligned with their goals. Establishing IRAs, education or brokerage accounts may be better alternatives to complement a 401(k) account.   Solutions to Take Regular review of investments. A review process need not be time-consuming; it just needs to be done regularly. The receipt of a quarterly 401(k) statement may serve as a cue to review the performance of investments. This review should focus on two areas: performance (absolute and relative) and management changes. Get Help.  Do-it-yourself investors making investment decisions on their own are at an unnecessary disadvantage; there are many tools available; however, it is a challenge to make an informed decision. For 401(k) investors with busy lives, an investment professional can help with the burden of making important 401(k) investment decisions. Create a 401(k) Checklist When reviewing a 401(k) use this checklist to determine the next steps: How much do I need for retirement? How am I going to get there? What is my current overall savings rate as a percent of my total income? How many investment selections are available in my 401(k)? Employer match available? If so, am I fully taking advantage of it? Is a self-managed account available which links to a brokerage allowing for greater investment flexibility? Is a Roth 401(k) available? Have I made after-tax 401(k) contributions in the past? Will I in the future? What resources am I using to make investment decisions? Am I fully utilizing IRA accounts in addition to my 401(k)? About The Author Ken Prather, CPA, CFP, advises individual investors on managing their 401(k) and 403(b) accounts. Ken can be reached at kprather@auto401k.com. Interested readers may visit www.auto401k.com.