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The Quest for a Favorable 401k – Understanding Your Options for Smarter Investments

Money Symbol 2

When you aren’t accustomed to doing it regularly, choosing what to invest in can be difficult. Heck, try investing routinely and you will see that it is never an easy boat to row.

If you don’t have a substantial idea of what to invest in your 401k, how can you evaluate whether your 401k options are any good?

Healthcare professionals, including nurses, counselors, and practitioners come to us with all sorts of opportunities for investment. In an ideal world, we would get to choose what our clients select from in their 401k. Unfortunately, this is often not the case.

Identifying Applicable Asset Groups

This past week, we began working with a client in the finance industry. His company offers investment platforms to individuals and institutions. Based on his profession, you would think this client would have a great spread of options. The reality could not be further from the truth.

Before we dive into his limited options, let’s begin by looking at what we believe to be a good selection of investment opportunities, which include the following 12 assets groups:

  • Large-cap US (the largest of the large companies — typically over $10 billion in value)
  • Mid-cap US (companies worth between $2 and $10 billion)
  • Small-cap US (companies worth less than $2 billion)
  • Developed countries (France, Japan, etc.)
  • Emerging markets (Brazil, Thailand, etc.)
  • US bonds
  • International bonds
  • Treasury inflation protected bonds (TIPs) – bonds that provide compensation for rising inflation
  • Real estate
  • Natural resources (gold, oil, and agriculture)
  • Absolute return- funds that select investments known to increase in value even when the stock market is declining
  • Cash

The idea behind incorporating such a diverse selection is that when one or more of these investments are doing well, the others may not be performing as great. Over time; however, the poorly performing investments increase in value and the diversity helps smooth out returns. Within each option, you may have one index fund that is low-cost, and another that is actively managed, whereby the additional returns offset the higher expenses.

All in all, you may be looking at 12 to 24 investment choices.

With the in-house knowledge to choose, you would think our client’s financial advising company would provide employees with the best options to choose from. We unfortunately discovered that such options were not offered for 401k investments within the business.

What we did find was that this company had five large-cap funds, three mid-cap funds, three small-cap funds, a fund that blends stocks and bonds, two foreign stock funds, two bond funds and two cash funds. To its credit, the funds were low-cost; however, this is where the kudos ends. From our list above, we can see that we are missing five crucial categories of funds: real estate, natural resources, absolute return, emerging markets, and TIPs.

Why Additional Opportunities Matter

Let’s take a look at when having these other investments would have been beneficial to our client’s 401k. From 2002 to 2006, emerging markets led the way in producing steep returns. Then from 2006 to 2007, natural resources did exceedingly well. From 2007 to 2009, TIPS — as well as other bonds — outperformed other investment options.

As for all the professionals figuring out whether or not your company offers valuable investment options, we advise you to compare your investment selection to the list we provided above. From there, we suggest contacting your benefits administrator to request a copy of the investments offered in the program to better understand what options may provide you with the greatest returns in the future.

photo credit: hyena reality via freedigitalphotos

Election Distortion

By Ted Schwartz

If you tune in to politics recently, you are encouraged to take sides in a false dichotomy. You are asked to choose between the people who believe in the free market and the people who believe in government (AKA “Socialism”). This is an absurd choice as both paths would lead to total destruction. Unfettered free markets are not in place to deal with long term societal issues. The government is not in place to deliver optional goods and services to people in an efficient manner. So, fortunately, we have a hybrid system that attempts to carve out a middle ground that allows us to muddle through. So, the real question for this and every election is, what is the optimal mix going forward of government and capitalism.

Free market capitalism seems to be the optimal system to provide goods and services to people. As its focus is primarily on profitability, a layer of regulation is necessary to protect the health and welfare of the public. Too much regulation can harm the market system and too little leads to toxic excesses (see 2008!).

The government’s main role is to look after society’s best interests now and in the future. That includes many complex and unprofitable tasks (how do we protect people from fire, workplace safety, what goods and services should we provide to poor children, how do we protect the earth for future generations, what infrastructure is needed to support the private sector).  These big picture items are beyond the scope of the market economy. Some tasks offer no hope of profit ever and some offer no current profit so will be shirked by the market economy.

Both the government and the private sector have a tendency towards waste and excess if left to their own devices. We, the voters and taxpayers, are charged with closely monitoring these systems, serving as a check and balance to unfettered power, and ultimately choosing where we should set the mix of government and private enterprise to maximize outcomes. It is a very tough and very important decision that we face, but it is not the decision bandied about on television and in the media.