Hope for Your 401k Account Producing Higher *Relative* Returns
Most 401(k) account holders are not aware that they could be achieving higher relative returns. This is especially true in a positive stock market environment. There’s the famous saying, “A rising tide lifts all boats.” The problem is your boat may not be not rising as fast as it could and also falling faster than it should when markets shift to a “falling tide”. In other words, your return, relative to benchmarks, or compared to a prudently designed portfolio, might actually be quite low!
We suggest thinking in terms of two steps. By the way – both steps are equally important and neither step is done very well. Step 1 is under your control. Step 2 requires you to step outside of your comfort zone. Remember, though, it is YOUR money.
Step 1: Grab the highest returns within the limitations of your 401(k) plan. Back to the “Rising Tide” idea. In investing you want to get full participation in the global market – in all the “rising tides” that are occurring. You also want to “fall less” when the rising tide turns to a falling tide. Diversification and low fees are the keys to both desires. Your victories that lead to winning the investment battle are small and numerous. An extra 0.5% gain here, and only dropping 0.5% when others dropped 0.8%. Day in, day out, those little victories put you in the winners circle.
Be sure to get help from a registered investment advisor (RIA), if your plan has one. You want to get the deepest stock exposure possible around the world. Highest diversification, lowest fund fees. Sometimes “do it for me” options such as target date funds and risk-based models in your plan are the best way to do that – but a significant portion of the time, they are not.
My experience has been, as we create financial plans for individuals with a 410(k) account, is that few people are properly allocated in their fund lineup and few have a great 401(k) plan. Therefore, their enjoyment of the long term gains are lower – often much lower – than what they could have had.
Speaking of age – you want your investment allocation to match your age, tolerance to risk and your current level of retirement preparation. People that are behind in their retirement saving may need to take a more aggressive stance as long as they know they will not touch the account for 7-10 years.
Rebalancing: if you are not using a “do it for me” option – then you need to rebalance. Once/year is fine, though after very large market moves, go ahead and make an “unplanned” rebalance. Contact us for more information. We’re not covering all the prudent investment concepts in this blog post.
Step 2: Once you have your investments set up as best you can within the limitations of your plan – it’s time to see what you can do about the plan limitations. Influence your plan sponsor to move the plan to the highest level of health possible. Talk to your plan sponsor. Be insistent – they have a fiduciary duty to you – tell them you want to see benchmarking they have done on your plan which should include not just “averages around similar plans” but actual Live Bids on your plan. Make sure they can differentiate between current plan cost and the cost “of the next dollar”. Often plans are much too dependent upon asset based fees (meaning a percentage of the total plan amount) – and as a result the plan sponsor is unnecessarily constantly fighting a fees battle because the fees are rising at the same rate as the plan assets. The cost of the next dollar is often 1% when it could be 0.3%. 1% is over 3X higher than 0.3%! The difference, 0.7% could be addition annual return in each account. Imagine 7.7% return instead of 7.0% return! 0.7% higher annual return compounded over years can be a $100,000 or greater impact!
The plan should have a retirement plan specialist consultant that is a registered investment advisor (RIA) that chooses the fund lineup for the plan sponsor. This RIA is unencumbered by commissions (conflict of interest) and therefore is able to hold all the providers on the plan to transparency and low fees – including resolving the unnecessary heavy dependence on asset based fees. This asset based fee over-relliance is leading edge understanding that the mainstream 401(k) providers, who profit heavily from these asset based fee structures, do not talk about. Therefore few plan sponsors understand.
Feel free to suggest our firm as a resource for your plan sponsor. We are not too fast to take on new clients – we’re not selling 401(k) products but rather 401(k) plan consulting. We work very hard for plans, so we only work with plan sponsors that are serious about taking their plan to the next level so their employees can enjoy a higher probability of having more money in retirement. We will not employ a hard sell. If the plan sponsor wants us to prepare a fiduciary risk review that includes live bids on their plan because they are sincerely interested in improving the plan – we will – at no cost. Or they will chose not to. If they do choose to have the plan reviewed – we’ll share what we would do to bring the plan to a high level of health. They can choose to hire us for that plan improvement work, or not.