As with all jobs, being an investment manager comes with some unofficial duties, including free guidance for family members regarding retirement savings. In fact, Olivia was recently helping a family member with investment choices in their employer sponsored 401(k) when she was provided a glaring reminder as to why people choose to hire professionals like us to manage it for them. Her beloved family member had chosen funds that made no sense for their goals, had high management fees, and were redundant at times. When probed about why they’d chosen these funds, Olivia was told that they had performed best in recent years, to which she firmly responded, “let me stop you there, dearest kin.”
It’s not our relatives' fault that lead to these poor choices. Anyone who's seen a menu of funds provided by their HR department knows how confusing and overwhelming they can be. You know the local diner with an eight page menu, including everything from pizza to sushi? That's what it can feel like. The funds are often not organized in any useful way, and their names are typically incomprehensible to the untrained eye. Data on available funds is predominantly led by recent investment performance, while one has to go digging to find the expense ratio. Furthermore, there are an overwhelming number of options, ranging from basic to extremely esoteric. The latter leading people to invest in places they don't understand. Much like at the greasy diner, you start out excited and hungry, but end up regretful and nauseated.
Even if you manage to get past all of the perplexing information and pick a few good funds, will you be able to accomplish this feat on a regular basis? Will you rebalance your portfolio properly through a decades-long career? Since it requires an unbiased lens to view the life savings of a person and not fall into a behavioral trap, it's often hard to do it yourself, assuming you even remember to perform the task.
If you do want to do it yourself, your employer sponsored plan should have at least one way to properly invest without stepping on a land mine. If you can, find the handful of broad-market, low-cost, index funds for the two main asset classes: stocks and bonds. The key is to not get distracted by fancy names and recent performance. Hone in on the easy to understand funds, and use their simplicity to your advantage. Having a few simple funds makes it easier to rebalance your portfolio on a regular basis and get your asset allocation back to target after market fluctuations.
If rebalancing sounds like a chore to you, target-date funds can be a one-stop-shop, but only if you use them correctly and fully understand the underlying asset allocation of the fund you choose and how it will change over time.
If you'd rather leave it in the hands of professionals, there are some ways to get help. When you eventually leave your job, you have the right to rollover your account (e.g. 401(k), 403(b), 401(a), 457) from your employer's plan into an IRA. Some retirement plans even let you rollover assets while you're still on the job. Meanwhile, other plans, such as at our nearby University of Michigan, will let you authorize a fee-only wealth management firm like Exchange Capital Management to manage your retirement plan directly. You still have to eat off the preset menu, but you can have help choosing the best food.
In the case of an individual account outside of the constraints of an employer plan, we're able to cook for our clients in our own kitchen, and we can use any number of raw ingredients. Since the building blocks aren't restricted, the portfolio is efficient and low-cost.
In the case of an employer sponsored plan, is it possible to order off a limited menu and still manage to build a quality meal? With the right knowledge and research tools, yes! Depending on the particular menu of the plan we're dealing with, we start with low-cost index funds for the main courses and add flavors from there, if needed. On the surface, the ingredients look quite different from how an open architecture version would look. Depending on what's available on the menu, though, the overall experience and flavors can be similar.
If you're tired of the remorse from accidentally ordering California roll flatbread on yet another mind-boggling trip to Cafe 401(k), then maybe it's time to find a dietitian who knows their way around the menu.
Who Wrote this Anyway? Who is The West Wing?
The West Wing (our offices are at the west end of the building) is made up of three full-time professionals (Andy, Olivia, & Matt) who are charged with leading the firm's day-to-day investment and trading operations.
The West Wing is well aware that this article is a little corny, but sometimes corny is ah-maize-ing. Andrew Stewart, CFA is a Senior Portfolio Manager, Olivia Stacey, CFA is a Portfolio Manager, and Matt Farris is a Trader at Exchange Capital Management, a fee-only, fiduciary financial planning firm. The opinions expressed in this article are their own.