Julie Ja­son:

Many ques­tions on 401( k) s.

Connecticut Post (Sunday) - - Sunday Business - JULIE JA­SON Julie Ja­son, JD, LLM, a per­sonal money man­ager ( Jack­son, Grant of Stam­ford) and award- win­ning au­thor, wel­comes your ques­tions/ com­ments ( read­ers@ julie­ja­son. com). To hear Julie speak, visit www. julie­ja­son. com/ events.

“Peggy” is ap­proach­ing re­tire­ment with an im­por­tant as­set, a com­pany 401( k) ac­count. She has lim­ited in­vest­ment ex­pe­ri­ence and lit­tle in­ter­est in be­com­ing an in­vest­ment ex­pert. What should she do as an ar­ray of de­ci­sions be­gin to face her as she gets to her re­tire­ment date?

That lays out the topic of con­ver­sa­tion in a 401( k) class I taught last week at Norwalk Com­mu­nity Col­lege. Un­like a pen­sion run by your em­ployer, the 401( k) gives the em­ployee con­trol over in­vest­ments, which is a col­lec­tion that is se­lected by the em­ployer for the plan.

Sometimes, as one at­tendee pointed out, the list can be over­whelm­ing, with too many op­tions to con­sider, es­pe­cially if the plan has a bro­ker­age or a mu­tual fund “win­dow.” But even a short list can be prob­lem­atic if the 401( k) par­tic­i­pant is in­ex­pe­ri­enced.

If in­vest­ment se­lec­tion and man­age­ment are not strengths of yours, how can you make sure you have what it takes to se­cure your fu­ture? Is the an­swer any dif­fer­ent if you are just start­ing to work and par­tic­i­pate in your 401( k) at work?

As a pro­fes­sional money man­ager, I can share that older 401( k) par­tic­i­pants who have sub­stan­tial as­sets ( usu­ally in the mil­lions and usu­ally close to re­tire­ment or al­ready re­tired) have more op­tions. Dur­ing em­ploy­ment, they can au­tho­rize a pro­fes­sional to direct the 401( k) in­vest­ments for them. Af­ter re­tire­ment ( or if in- ser­vice with­drawals are per­mit­ted by the plan), they can re­tain in­de­pen- dent pro­fes­sion­als to man­age their in­vest­ments out­side of the 401( k) plan en­vi­ron­ment if they de­cide to roll over the 401( k) to an IRA.

In ad­di­tion, “pro­fes­sional man­age­ment so­lu­tions” are avail­able through a prod­uct of­fer­ing, such as tar­get- date or life- cy­cle funds, which are now be­ing of­fered in many 401( k) plans. These prod­ucts could be a suit­able op­tion for some 401( k) par­tic­i­pants. For ex­am­ple, in a re­cent re­port, Vanguard Group points out that some “do- it- your­self” in­vestors may hold “ex­treme port­fo­lios” with no eq­ui­ties or only eq­ui­ties. Tar­get- date funds of­fer a com­bi­na­tion of eq­uity and fixed- in­come as­sets. As such, they can “im­prove port­fo­lio di­ver­si­fi­ca­tion com­pared with par­tic­i­pants mak­ing choices on their own,” ac­cord­ing to Vanguard. Agreed.

The In­vest­ment Com­pany In­sti­tute is call­ing tar- get- date funds “one of the most im­por­tant in­no­va­tions in re­tire­ment sav­ings.” They pro­vide “a convenient way for a re­tire­ment plan par­tic­i­pant to pur­chase a mix of as­set classes, pro­fes­sion­ally de­signed and man­aged, that is re­bal­anced and be­comes more con­ser­va­tive as the par­tic­i­pant ages.” ( See ICI: Tar­get Re­tire­ment Date Funds Re­source Cen­ter at ici. org/ trdf.)

More than 50 per­cent of younger 401( k) par­tic­i­pants ( ages 25 to 34) are in­vested in tar­get- date funds ( tar­get­ing the year 2050), ac­cord­ing to Vanguard. Of the new par­tic­i­pants en­ter­ing the plan for the first time in 2017, nearly 9 in 10 were solely in­vested in a tar­get­date fund. The rea­son? Many plans au­to­mat­i­cally place 401( k) par­tic­i­pants in these funds un­less they opt for dif­fer­ent op­tions. Across all age groups, more than 50 per­cent are “wholly in­vested in a sin­gle tar­get­date fund, ei­ther by volun- tary choice or by de­fault.”

Vanguard’s data­base en­com­passes close to 5 mil­lion par­tic­i­pants and more than 10,000 plan spon­sors. In this col­umn, I’m quot­ing from “How Amer­ica Saves 2018: A re­port on Vanguard 2017 de­fined con­tri­bu­tion plan data.”

Some be­lieve, as Martha King, man­ag­ing di­rec­tor of Vanguard In­sti­tu­tional In­vestor Group, said in the re­port, that “pro­fes­sion­ally man­aged in­vest­ment op­tions” can po­ten­tially “re­shape re­tire­ment sav­ings out­comes. They sig­nal a shift in re­spon­si­bil­ity for in­vest­ment de­ci­sion- mak­ing away from the par­tic­i­pant and back to em­ploy­ers­e­lected in­vest­ment and ad­vice pro­grams.”

That’s interesting. I can see that tar­get- date funds might keep some 401( k) par­tic­i­pants from over­do­ing an ex­treme po­si­tion — “I’m afraid of the stock mar­ket, so I’ll stay in cash,” or “I’m all for the stock mar­ket, so I’ll buy stocks and noth­ing else.” But who else can ben­e­fit?

Next week, we’ll ex­plore how tar­get date funds work. Are they the “pro­fes­sion­ally man­aged so­lu­tion” for the ev­ery­day 401( k) par­tic­i­pant?

The Vanguard re­port is avail­able at press­room. vanguard. com/ non­in­dexed/ HAS18_ 062018. pdf.

If you are par­tic­i­pat­ing in a 401( k) plan at work, please par­tic­i­pate in my cur­rent reader sur­vey. This week’s ques­tion: “Does your em­ployer of­fer a 401( k)?” Link to that sur­vey at: sur­veymon­key. com/ r/ 2QY36QM.

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