Studies have shown that the more investment options available in a 401(k), the lower the participation percentage. This is because most employees lack the desire or knowledge to carefully select their investment options. One way an advisor can mitigate this issue is by offering an asset allocation option that provides a participant exposure to stocks, bonds, and cash through a single fund. Two of the most common types of asset allocation funds in 401(k) plans are target date funds and customized 401(k) portfolios, i.e. "managed models".
Target Date Funds Target Date Retirement funds are becoming an increasingly popular investment option in 401(k) plans. If your recordkeeper offers an open architecture 401(k), then you will have the benefit of choosing among target date offerings from multiple fund families. All target date funds follow a "glide path" which is essentially the percentage of assets allocated to stocks, bonds, and cash. Most mutual fund families offer these funds in 5-year increments, although some may only offer 10-year increments. As the target date approaches retirement, the funds get more conservative, lowering their allocation to equities and increasing their allocation to bonds and/or cash.
Many investors are unaware that there are really two separate types of target dates funds; "through retirement" funds are designed as an investment that is supposed to be held in one's retirement years. As such, these funds typically have an equity allocation of 50-60% around age 65, decreasing to 20% thirty years after retirement. The concept of these funds is that one's retirement could last many years, so they need to maintain a fair amount of equity exposure to make one's retirement balance last. Vanguard is an example of a fund family that offers "through retirement" target date funds.
The other type of target retirement date funds are known as "to retirement" funds. As the name implies, the goal of these funds is to get one to retirement, at which point the primary goal becomes generating income while minimizing risk. J.P. Morgan's offering is an example of a target retirement fund that can be classified as a "to retirement" fund; its equity allocation at age 65 is only 33%.
"Managed Models
Whereas target retirement date funds are almost exclusively comprised of funds from a single fund family, managed models can include funds from multiple fund families. Some recordkeeping systems will limit the models to include only funds available in the plans' core lineup. However, other open architecture 401(k) platforms may allow funds outside of the core lineup. Managed models are a great way to include EFFs in 401k plans. While many ETFs are appropriate when used in models to reduce volatility while increasing returns, they may not be appropriate as standalone investment options.
Managed models are extremely flexible and can be established as either age based or risk based products. Since there isn't a published glide path that needs to be followed, an advisor can employ either a tactical or strategic allocation approach. This allows a tactical advisor to take advantage of market opportunities by changing the risk level of the portfolio. For the advisor using a strategic asset allocation, a managed model can be automatically rebalanced quarterly, semi-annually, or annually.
In summary, for the majority of participants, it is a good idea to leave asset allocation in the hands of a professional. Rather than attempting to decide how much money to allocate to the major asset classes and ultimately to funds within those asset classes, selecting an asset allocation fund such as a target date fund or a managed model is a great way for participants to receive proper exposure to both equity and bond markets.
401K Investment Advice How Do I Choose the Best Retirement Investment? Provident Fund Withdrawal - Duties of the Regional PF Commissioner Rules and Regulations For a Self-Directed IRA The Rules of a 401k Rollover Borrowing Money From Your 401k
0 comments:
Post a Comment