Raskin Planning Group

Is Your 401(k) Retirement Plan Investment Helping You Meet Your Objectives? – Part 2

In our last article, we discussed 401(k) retirement plans and risk-based (RBF) or target date asset allocation (TDF) funds. In this article, we will discuss the key differences.

Not all RBF/TDFs are the same. Here are some of the key differences:

  • Most RBF/TDFs are “funds of funds” comprised of proprietary funds from the investment company offering the RBF/TDF. The Fidelity Freedom Funds or the T.Rowe Price are made up of funds from only their respective fund complex. Not every Fidelity or T.Rowe Price fund in their respective TDF is a top performer.
  • Some investment companies will choose top performing funds from different fund companies. They will monitor these funds and make necessary changes over time.
  • Some investment firms offer RBF/TDF’s that consist of low-cost index funds. Investors get broad asset allocation exposure but these funds tend to be less expensive than actively managed funds.
  • Investment firms have different investment philosophies. How much of the portfolio is allocated to developed international or emerging markets? Is there exposure to real estate investment trusts, commodities, hedge funds, non-U.S. bonds or high-yield bonds? These asset allocation decisions will affect long term risk and returns.

What is the investment firms “Glide Path”? Investment firms will reduce exposure to stocks at different rates as employees approach retirement. These different paths can make a big difference to an employee. To illustrate this point, below is an illustration of an aggressive and a conservative glide path:

Years from Retirement TDF Aggressive Stock Allocation TDF Conservative Stock Allocation
30 100% 90%
20 95% 65%
10 80% 45%
Retirement 50% 30%
10 Years Past 50% 30%

Some TDFs have a “To Retirement” versus a “Through Retirement” philosophy. The more conservative “To Retirement” approach assumes the participant will take a distribution at retirement. The “Through Retirement” approach assumes the retiree will keep the funds fully invested past the retirement date.

Recently, a client retired with a large retirement plan account balance invested in a proprietary TDF. It represented almost 50% of her investment portfolio. The TDF is a good fund that served her well during her working years as she saved for retirement. But now that she is retired, will this TDF meet her overall investment objectives?

Because of the client’s risk tolerance and current income needs, we recommend an overall allocation that is about 50% stocks and 50% bonds. Good tax planning suggests asset location is also important. Ultimately, we want less risk and more bonds in her retirement account (40% stocks/60% bonds) and more risk and less bonds in her non-retirement accounts (60% stocks/40% bonds).

The client’s primary objectives for the retirement account are reliable income, moderate growth so the portfolio keeps up with inflation and less volatility than the market. The TDF investment firm utilizes a “Through Retirement” asset allocation philosophy and her fund is currently 60% allocated to stocks, with a large allocation to U.S. and non-U.S. growth stocks.

We recommend a retirement portfolio that is 40% allocated to stocks, utilizing stocks that tend to be less volatile than the general market and pay higher dividends. This will mean transferring her 401(k) plan to a customized individual retirement account where an investment strategy can be tailored to her personal objectives.

Risk-based and Target Date Funds are usually appropriate for employees as they save for retirement. But employees should understand how these funds are constructed. Once retired, many employees are better off customizing their investment strategy based on their actual personal objectives.

Contact the Raskin Planning Group to discuss your objectives and to understand your retirement plan investment options.

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Is Your 401(k) Retirement Plan Investment Helping You Meet Your Objectives? – Part 1

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