What If My 401(k) Has Poor Investment Options?

Anyone that has worked with Woodard & Company over the years will know that as a courtesy we will review client retirement plans and offer our thoughts and recommendations. Part of this review requires that we take a look at the individual investment options in the plan and over the years we have seen A LOT of choices from which participants can select. The quality of these retirement plan options can vary from quite poor to very good.

401kOf course it’s easy to put a lineup of good funds together in an appropriate allocation for somebody but what do you do when your options are not so good? After properly evaluating the participant’s risk tolerance and objectives, then determine if the investment options available will help achieve those goals. The good news is that most of the time they do.

First, always do as much research on the individual fund managers as possible. This may take some time but it should give you an idea of how the fund will perform in up and down markets, especially if the manager has been around for a while. Then look for what types of funds are available. For example, hopefully the funds available provide access to fixed income and stable value, international equities and U.S. large, mid and small cap equities, both growth and value. However, if these type of actively managed options don’t exist, or do exist but are poor choices, then look for index funds such as a U.S. aggregate bond index, international EAFE (Europe Asia & Far East) index as well as an S&P 500, Mid Cap 400 and Russell 2000 index. Although using these types of index funds is a passive approach to investing, it will at least allow you to participate in the markets, as the markets perform.

We often get asked about Target Retirement Date Funds. These are funds that automatically reallocate each year to a more conservative portfolio based participant’s desired retirement date. While these are typically my last choice, at a minimum they do provide a plan participant with exposure to the markets. For many investors, target date retirement funds are not so bad.

As always it’s a good idea to review your retirement plan at least once a year not only for your allocation but sometimes your plan sponsor may even change the fund lineup for hopefully an enhanced investment opportunity!

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