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What Is 401k Diversification?

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  • Written By: Kristie Lorette
  • Edited By: O. Wallace
  • Last Modified Date: 02 September 2016
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401k diversification is finding the right mix of investments for the retirement account to help the account holder to reach their retirement goals. In order to achieve 401k diversification, the account holder has to assess how much money they want the account to hold when they retire, how many years they have until they retire and whether they are a conservative, middle-of-the road or risky investor.

The purpose of a 401k is to save money for the account holder to use to cover living expenses when they retire. The purpose of 401 diversification is to make sure that the investor has a balanced investment portfolio that will help them to achieve their retirement investment goals when the time to retire rolls around.

Part of the 401k diversification process is to choose the right mixture of investments so that it meets the investor’s ultimate goal. One of the factors that goes into 401k diversification is how much time the account holder has from the time they start the account to the time they plan to retire. If the investor has a longer time frame, they can choose to take a riskier diversification approach than someone who has less time until retirement comes.

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Generally, a 401k is an employer-sponsored retirement account. This means that the employer has chosen an investment firm to manage each of the employees’ 401k plans. This does not preclude the employees from being able to achieve 401k diversification. It may, however, limit the options in investment choices that allows the account holder to choose the investment options where they want to place their money.

The bottom line of 401k diversification is finding the right mix of different types of investments that will allow the account holder to achieve their retirement goals. Typically, this type of diversification includes some low risk, moderate risk and high risk investments. The percentage of each of these types of investments correlate directly with the money goal, time horizon and risk tolerance that the account holder has.

For example, one of the most conservative investment options to choose as part of the 401k diversification process may be bonds. One of the moderate portfolio investment options is mutual funds. One of the highest risk investment options is stocks. Reaching 401k diversification is finding the right investments and the right amount of each. Retirement diversification also requires reevaluation and reassessment of the account on a quarterly, semi-annual or annual basis to make any changes necessary to rebalance the diversification.

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