Congress Could Allow Riskier Assets in 401(k) Plans. Are Your Savings at Risk?

This development is really a mixed bag.

There's a reason so many seniors end up struggling financially once they retire. A lot of people either don't build savings, or don't invest their long-term savings aggressively enough. Instead, they limit their IRAs or 401(k)s to safer, less volatile assets, like bonds, which don't tend to deliver the same strong returns as stocks.

Now, if you have an IRA for retirement savings purposes, you'll generally get a wide selection of assets to choose from. Those might run the gamut from individual stocks to ETFs (exchange-traded funds).

If you have a 401(k) plan through an employer, your investment choices will generally be far more limited. And you generally can't buy individual stocks in a 401(k). Rather, you'll have to choose from different funds.

A new change to 401(k)s

The good thing about 401(k)s is that they're designed to help savers limit their risk. As such, they often don't include investment choices that are considered overly risky or speculative. But some might argue that barring these types of investments does a disservice to savers who may be more tolerant of risk, and who may want to put their money into these assets in the hopes of snagging higher returns.

In late September, lawmakers introduced legislation to include a wider mix of assets in 401(k) plans -- namely, assets that have the potential to be more risky, like private equity and real estate. Dubbed the Retirement Savings Modernization Act, the bill has broad support from the financial industry.

But is opening the door to riskier investments a good thing for 401(k) savers? Or will it backfire?

A mixed bag

Seniors this year have faced rampant inflation, as have consumers across the board. But that's highlighted the need to help retirement savers build wealth at a more rapid pace. And introducing a broader mix of investments could be the ticket to achieving that goal.

The problem, though, is that some 401(k) savers aren't seasoned investors. Rather, they're everyday people who are working hard to sock funds away for the future. And some of the riskier investments being proposed for 401(k)s may not be appropriate for the average saver.

As it is, 401(k) and IRA savers bear the risk of a market downturn battering their retirement portfolios. In fact, this year alone, a lot of people have lost money (at least on paper or on screen) in their IRAs and 401(k)s.

For those in their 20s, 30s, or 40s, that may not be a big deal, as there's time for their portfolios to recover ahead of retirement. It's savers in their late 50s and 60s who are now in more of a precarious spot.

How aggressively should you invest your retirement savings?

The reality is that sticking to safer assets like bonds in your retirement plan could result in inadequate growth. And that could, in turn, leave you cash-strapped once your senior years roll around. A good bet, therefore, is to invest at least some of your money in stocks -- especially when you're relatively young and retirement is many years away.

That doesn't necessarily mean you should look at alternative investments that may be more difficult for you to vet or understand. But if you are interested in branching out and growing your retirement savings more aggressively, it could pay to sit down with a financial advisor -- someone who can help you understand the risks you're taking on versus the rewards you have the potential to reap.