Many times over the years I’ve looked at outside 401k plans for clients and others who have requested this. Often, they know these choices are important but they may not have a clue about how to make the choices or who to turn to.
In bigger companies, human resources professional offer advice about how to sign up or withdraw money but may not know much about how to pick investments either. The decision point often is when an employee is new to a company, has to deal with lots of paperwork and is nervous about adjusting to so many new things. Picking a 401k investment portfolio is way down the priority list.
That’s too bad because the choices of how much to invest and where to put the money are important, especially if you are young and stay on the job for a long time. I’ve also seen people who have held many jobs and accumulated a string of retirement plans and have no way or interest in developing a coherent investment strategy.
Many plans now are electronic only and obtaining relevant information from these websites or digital brochures can be frustrating. As a consequence, many people settle for making what they believe are common sense choices. Many plans offer target date funds and what could be simpler than determining your retirement date and signing up for that fund? Or they pick something else that sounds good: what could be wrong about a “balanced” fund. Failing that, how about picking 4 or 5 choices. That way, at least some of them may be good.
People who are actually using these accounts to invest and save for retirement, have a genuine long-term outlook (many decades) and aren’t using these accounts as expensive piggy banks (borrowing the max whenever possible) could be denying themselves a powerful investment tool.
For someone who is in their 20s or 30s and may not touch their retirement accounts for 30 or 40 years, their most precious investment resource is time. And by making a choice that is not thoughtful or downright wrong, they squander this valuable resource.
The daily ups and downs of the stock market matter little if one is putting away money for the distant future. If one properly constructs a diversified portfolio and leaves it in place for decades, the returns can be powerful.
In investing, as in much of life, there are no guarantees, Instead, we have to rely on the odds and weigh the potential risks and probable returns. In some cases, making reasonable changes to the investment mix and using assumptions based on long-term historical returns, returns of double or more over the decades are possible.
Before making the choices, we have to look at someone’s complete financial life, their hopes and dreams, the stability of their career and their tolerance for risk. Doing all of these things with the help of an experienced professional can make a big difference in someone’s financial life. It’s worth spending a little time on the choices rather than rushing through the burdensome paperwork.
