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One of the most frequently asked questions we get is, how should I invest in my 401(k)? Well, that all depends on who you ask and where are in life. 401 (k) plans have $6.4 trillion in assets as of 2019 between 60 million active participants. That is an enormous amount of money that requires a great deal of attention. According to ThinkAdvisor, in 2018 U.S., retirement assets accounted for 1/3 of household financial assets, totaling $29.2 trillion! We can keep going on and on with the facts. As you can imagine, your retirement assets are a huge deal. Here are some of the ways you can manage your retirement assets that you may have not been aware of.



Set it and forget it/target-date funds

This is by far the most common way individuals handle their retirement accounts at work. A study by Vanguard showed that in 2020, 50% of participants invested their money into a target date fund. For most retirement accounts, the target-date fund series is the qualified default investment option. This means that an individual who signs up to participate in their at-work retirement plan will most likely end up in a fund that corresponds to their 65-67th birthday. In turn, the portfolio manager running the target-date fund will make changes to the portfolio overtime. The objective is to make the investments more conservative until the target year is reached. The idea makes sense for many investors, but it fails to take into consideration other facts such as early/later retirement or, not retiring in the target year the participant was assigned to. Time horizon and risk tolerance also play a significant role. Not all 40 or 60-year-olds have the same time horizon or appetite for risk. Other factors such as Social Security, pensions and longevity must also be factored into an asset allocation.

On the same that same note, I have seen retirement plans that do not offer target-date funds or a qualified default investment option. This means that the participant in the plan my be put into an unsuitable investment options such as a money-market fund (similar to cash) or an S&P 500 fund. Take a quick look at your most recent 401(k) and you will be able to determine where your money is allocated to.


The family member/friend/coworker

Most of these individuals enjoy doing the research and may be successful at managing their own assets. The problem is that their goals will not necessarily match yours. I worked with a client who received advice from her 60-year-old uncle, while she was in her 30s. in doing so, her assets were not invested correctly. Her uncle had put most of his funds in conservative investments such as bond mutual funds and ETFs as he was 6 years away from retirement. Her assets gave up years of market growth by not having the proper exposure to the market at a younger age.

I have also seen an individual take advice from a coworker or friend and not make changes for years. We brought on a client last year who had overhead a conversation from his coworkers regarding a market correction about 3 years ago. He then rushed to move his money into cash like holdings. Over the last 3 years prior to working with us, the S&P 500 returned about 49% vs .01% from her money-market fund. As you can imagine, he was not too happy with upside potential he had given up.


Do it yourself

The do-it-yourself options does not appeal to many, due to the extremely daunting tasks that it requires. The responsibility of making trades, rebalancing, and redirecting future contributions falls on the participant. Additionally, there is some market research needed which becomes the participant’s responsibility. In managing your own assets, you will have access to an average of 20-27 investment options as part of the core fund lineup. In most plans, about 10 for these funds are target-date funds from the same family which could create redundancies. The investment menu is somewhat limited, but most plans offer a broad market exposure. Some plans also offer access to self-directed brokerage accounts, which I will discuss next.


Work with a professional

There are many ways to work with a professional and professional advice. Some financial advisors are not able to advise their clients on their retirement assets in a work-sponsored plan. Most of it comes down to compliance restrictions, the lack of compensation and the added risk. In the previous companies that I worked in, giving 401(k) advice was a huge no-no.

The first option when working with our clients, is to use the core fund lineup in the plan. In doing so, we can build a portfolio based on the client’s risk tolerance or time horizon. Additionally, our approach is more comprehensive as we take into consideration other factors such as other assets, sources of income, taxes, and estate planning amongst many. Once the allocation is determined, we can either trade the account on behalf of the client or send periodic updates that the client would then execute.

Some retirement plans allow for a self-directed brokerage account or, SBDA. A self-directed brokerage account is simply a brokerage account that lives within your 401(k), 457 or 403(b) plan. From experience, plans offered by large employers such as Banner Health, Intel, General Dynamics, Dignity Health, Tenet Health amongst many, offer this option. The SBDA allows for access to more investment options than the core plan. These options include ETFs, mutual funds and individual stocks and bonds. The participant can also allow for third-party trading which would allow their advisor to execute said trades. In doing so, we can take over and the 401(k) management through discretionary trading.

Now that you know a bit more about 401(k), go out and do some research to see which option is a better fit. Each options pros and cons should be considered as not all investors are the same. Please reach out with any questions!


Until next time, stay safe and well.