Many questions on 401( k) s.
“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.