How important is choice in your 401(k) options? Do you want to have a set of 10 or 20 mutual funds and investments from which you get to choose your retirement portfolio allocation?
There’s a concept gaining momentum in the retirement planning sphere that reduces 401(k) investor choice. This old, revitalized idea is the managed portfolio.
Simply, it’s a portfolio comprised of several investments managed by someone else. The idea is that an expert is changing your retirement investments, as needed, when economic tides call for a reallocation. All you have to do is contribute money, and it’s managed for you.
The industry may be looking at this model because, statistically speaking, investors don’t fare as well on their own; the average 401(k) investor will benefit, in the long-term, from using expert advice in one form or another. Still, some investors enjoy spending time researching their investment options and setting their own allocation. These people may not react favorably to a 401(k) plan that eliminates their ability to self-manage.
Some employers already offer 401(k) managed portfolios, but current incarnations generally allow employees to choose whether to use the option. If you lost the option to select your own investments, would it bother you? It’s unclear whether self-management could ever be edged out.
I have to be honest. I like the idea of managed portfolios. But—and this is extremely important—it must be done well. A good managed portfolio 401(k) plan must:
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.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.