Is Anyone Managing Your 401(k)?
Many investors have a 401(k) or 403(b) retirement plan that includes limited investment options and, as a result, fewer opportunities to diversify. In order to simplify the investment decision making for investors and to minimize the costs of administering the plan, most plans offer only 5-10 distinct investment choices. This can be frustrating since the retirement plan is often an investor’s largest asset.
A truly diversified plan would allow for more choices, covering broad asset classes, and would allow for investments in areas such as emerging markets, international bonds, real estate investment trusts amongst others. Research has shown, however, that if too many choices are offered in a plan, then an investor is more likely to be overwhelmed, resulting in poor decision making on the investments.
So what can be done to make improvements?
Assuming the retirement plan is not the only investment and that significant funds are owned outside the retirement account, such as taxable brokerage and IRA accounts, then a great opportunity to coordinate investments exists. With the use of aggregation tools and software, a diversified portfolio can be structured using the holdings outside of the plan to complement the fund choices within the plan. By downloading all account information into one location, investments can be selected appropriately across all of the accounts to make up one comprehensive investment portfolio, with the ability to capture each and every asset class desired. Plus, within the retirement plan there is no longer a necessity to settle for a poor performing fund just because it is the only fund in its investment category. Instead the best investment choice can be selected to fill each asset class, utilizing the accounts outside of the retirement plan to fill the holes within the plan.
An added benefit of this approach is that more money can be kept in an investor’s pocket by creating a more tax-efficient portfolio. Choices can be made to invest more tax-efficient holdings such as stocks (taxed at lower capital gains rates) in a taxable brokerage account and hold less tax favorable investments such as bonds (taxed at higher ordinary income tax rates) in tax deferred retirement accounts. Downloading and managing each of these accounts for the most up-to-date information is the only way to keep up with the large number of moving targets.
The technology to accomplish this degree of comprehensive portfolio management is a game changer! The cost may be relatively high for an individual but by working with a financial advisor who offers this service, better diversification can be achieved, increasing the potential for improved investment returns.
To learn more about David Wilder at Total Wealth Planning, view his Paladin Registry profile.
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