A good managed portfolio 401(k) plan must:
- Have well-managed underlying investments. It requires good mutual funds that have performed well through market ups and downs relative to their peers in the same asset class, and a fund manager has been with the fund through these ups and downs and has managed the fund in accordance with the parameters of its prospectus.
- Only offer portfolios that are diversified across several asset classes. Retirement investors need to protect their nest eggs with investments that span multiple asset classes so that, when one class experiences volatility, the retirement portfolio can glean stability from the other asset classes.
- Offer several portfolios in order to provide appropriate options for all employees.
- Help employees to select the appropriate managed portfolio based on the individual investor’s risk tolerance, timeline to retirement, retirement goals and personal preferences. This shouldn’t be a guessing situation. Your employer or the financial services company providing the portfolios should provide a questionnaire that helps you pinpoint the appropriate portfolio for your current needs.
- Not add significant expenses because another layer of management is being used. You can expect to pay for an additional service like managed portfolios or advice, but costs should be reasonable.
Managed portfolios are not strictly a set-it-and-forget it option. There’s no such thing, and you should be leery of anyone who tells you otherwise. Investors’ goals and timelines change. Your tolerance for risk could even change. It stands to reason that investors in a 401(k) plan with managed portfolios could need to move through several portfolios over the course of a working career.
Your work doesn’t end there. Now and always, regardless of industry developments, employees should periodically check in on their 401(k) plan ratings—try Brightscope.com. Keep tabs to ensure your employer is providing a good plan. If managed portfolios are a trend that continues to grow, some lower quality options could pop up. Employers need to be vigilant in ensuring they offer managed portfolios that are well managed and appropriate. Due diligence will continue to be important so employers fulfill fiduciary duties.
This one change will allow more of your employees successfully retire. The 401(k) plan was designed as a supplement to a pension plan, it has become the sole source of retirement for most Americans. Plan sponsors should treat their plan more like a pension plan.
Please comment or call to discuss how this affects you and your company.