When I meet with someone to review their employer-sponsored plan, I review four things, for starters:
- How much can you afford to contribute to the plan?
- Which should you contribute to, the Traditional or the Roth plan?
- How should it be invested?
- Are your beneficiaries correct?
Most participants can figure out number one by themselves, and we address number two in this blog post. Number three can be a tricky one, though, so I will address it here.
The investment choices in your retirement plan will likely fall into one of three investment product categories:
- Age-based investment products – these are investment products intended to follow one’s career all the way to—and sometimes beyond—retirement. They employ what is called a glide path, which is a systematic way to shift the mix of investments from risky to safer as one gets older. In short, a 60-year old should not have the same mix of assets as a 20-year old, all else equal. These were designed to be all-in-one funds, to represent 100% of one’s account/plan, but don’t have to be. Additions of other investments, however, will dampen the systematic shifting described above.
- Allocation or other all-in-one investment products – these are similar to the age-based products, in that they can be complete investment choices if they are properly diversified. Typically, these include within them a mix of stock and bond investments. They differ from the age-based products in that they do not factor in one’s age. Often there’s a connotation of risk; words like “aggressive” or “moderate” may be included in the names.
- Everything else. Your retirement plan includes a menu of fund choices that likely includes one and/or two above, but it probably also includes other funds, such a foreign stock fund, a small-company U.S. stock fund, bond funds, etc.
From here, we have a choose-your-own-adventure way of considering these options. You can choose the restaurant metaphor or the plant metaphor.
The Restaurant Metaphor
I deliberately included the word “menu” in #3, above to transition into this metaphor—and it’s a bit of a stretch. Option #3 is like ordering off the restaurant menu, ala carte. You choose the entree, your sides, and maybe a dessert—or you can choose two desserts; it’s up to you. Option #2 is like ordering a combo meal, where everything is chosen for you. You get the burger, fries, and a drink. Option #3 requires a little imagining, but it’s like ordering a combo meal tailored to your BMI (Body Mass Index). Maybe your BMI is a little too high, so you might get the grilled chicken with lettuce, tomato, and no sauce instead of the burger. I’m not aware of this option at any restaurant, and that’s fine with me…I can make my own choices, just like in a retirement plan, but if you want some help, options 1 and 2 are available.
The Plant Metaphor
Imagine three plants you can choose from, an orchid, a succulent (e.g. a cactus), or a silk plant. Orchids are notoriously difficult to grow—one has to know how to care for an orchid; neglect it, and it dies. This is like investment choice #3, above; you really need to know what you’re doing. Invest too much in the wrong fund, and you could be in for a wild ride or you may come up short of your retirement goals. What’s more, you’re going to need to check in on your investments to make sure they haven’t gotten out of alignment. Option #2 is more like owning a succulent. The snake plant in my office thrives on a monthly watering. Otherwise, I can just enjoy it. It needs a little care, but nothing like an orchid. Option #1 is like buying a silk flower arrangement. It won’t ever need watered, and it will still look nice. You can’t totally neglect it though; it’ll need a periodic dusting off so that it looks nice.
For me, it’s the age-based option because even though my entire career has been in investments, I don’t want to have to check on my 401(k). I have more important things to do like raising a family and going fishing. Maybe for you, though, there’s a thrill in allocating portions of your retirement plan to different investment types. Just keep in mind that you will need to be a bit more involved with your retirement plan.
To be clear, your retirement plan’s investments should never be neglected, but some need more/frequent attention than others. We are happy to help you understand your plan’s investment options, and you can reach us by clicking on the Contact Us button on the upper right-hand corner of every page on our website.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult with an investment professional prior to investing.