Investing Properly . . . Another Step Toward Retire-ability
September 6, 2018 — It’s attainable – employers can reduce the financial stress of employees and help them reach retire-ability – to the benefit of employees and to enhance the profitability and productivity of the companies they work for.
A successful step-by-step process starts with an organization’s commitment to its 401(k) plan – understanding that the company retirement plan is a great place to provide financial education and design the plan that will best encourage retirement plan savings. This fourth blog in my Retire-ability series describes how to help employees build successfully toward retirement by making it easy for them to invest properly.
Many employers think that if they provide the best low-cost individual funds to their employees, they’ve done their part. That’s a great first step! The average employee, however, doesn’t know how to assemble and manage funds to create the diversified portfolio that will optimize market returns and help their retirement nest egg best grow to provide for their future needs.
The best solution – professionally managed model portfolios – is increasingly available to small 401(k) plans. It’s important to understand how model portfolios differ from what is more frequently offered – Target Date Funds – and why replacing this one-size-fits-all approach with professional investment management provides a better benefit for employees.
It starts with the fact that all people aren’t alike. Target Date Funds assume, for example, that everyone who plans to retire in 2050 requires the same investment strategy. Fact is, they may not receive the same Social Security payment, have the same retirement savings or experience the same standard of living. They should each be invested according to their situation.
Less understood is that Target Date Funds vary widely, and employers can pick the wrong series for their employees and actually do them a disservice! A Target Date fund is a mix of stocks, bonds and cash equivalents, which becomes more conservative (with a lower stock allocation) as the fund reaches its target date. But the percentage of the fund invested in stocks at the target date can vary widely depending upon the Target Date Fund series. Morningstar found, for example, that the allocation for stocks at the target date ranged from a high of 64 percent in one fund series to a low of 8 percent in another. And, there are many other variations among Target Date Funds, such as the fact that the investment allocation in some series stays the same after the target date is reached, while others continue to grow more conservative.
Professionally managed models – often offering a simple choice among five risk-adjusted portfolios – make proper investment possible for employees (while relieving employers of possibly picking the wrong Target Date program for their 401(k) plan). Selecting a model is easy for employees as assistance is provided via a paper or online questionnaire and with access to a professional advisor. Once the selection is made, the 401(k) participant is in a portfolio that is a good fit and monitored and rebalanced on his or her behalf.
Another way to appreciate the advantage models offer is to understand that employees in a professionally managed portfolio are benefitting from the investment management principles that high net-worth individuals enjoy as they work with a professional advisor. Consider that any experienced investor who sought the guidance of a knowledgeable advisor would turn heel and exit the advisor’s offices if the advisor suggested investing in a Target Date Fund!
Next month’s Retire-ability blog will explore a fourth important step to relieve employees’ financial stress and help achieve retirement readiness: communications best practices to make financial wellness a part of your company’s culture!
This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consutlation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.
Written by Laurie C. Wieder, PPCTM, Vice President, Alliant Wealth Advisors Qualified Plans Division