How 401(k) investment choices are determined It should come as no surprise that all investments are not created equally. But every investment offered by 401(k) plans should be in the best interest of plan participants. Investments that arent in their best interest tend to be needlessly expensive and underperform over time. Unfortunately, that distinction isnt limited to any one type of asset; instead, there are many individual stinkers. The best investments are the ones that go up and the worst are the ones that go down, says Mark Davis, senior vice president and financial adviser at CAPTRUST Financial Advisors in Westlake Village, California. Its tricky to identify these investments. For individuals, the fees associated with a mutual fund or exchange-traded fund can offer clues as to how the investment will pay off in the long run. But focusing on fees isnt a foolproof strategy for outperformance or risk management. People have varying needs and risk thresholds, and one size rarely fits all when it comes to 401(k) investment choices. The best investments in the world of 401(k) plans should be those with the lowest cost relative to the riskiness of the investments and the level of returns. Its no easy feat. Very generally, the best funds for 401(k) plans, according to the strategy Davis uses, are those that temper their efforts to reach for big returns in favor of less risk. We would give up a little upside return in return for a manager that takes less risk on the downside. When youre choosing investment options for other peoples money, its more important to protect on the downside rather than reach for the upside, he says. Further complicating matters, the best investments for your companys 401(k) plan may not be the best investments for a company in a different industry. Every plan is different. What I might offer a lawyer would be different than what I offered to ditch diggers, Davis says. Index funds: Good core option Low expense ratios, low turnover and broad exposure to many stocks or bonds typically make index funds a perennial favorite among many investment advisers for at least part of a portfolio. Over time, index funds outperform actively managed funds. They have low disclosed and hidden costs, mainly driven by turnover. Index funds have low turnover while active has high turnover rates, says Craig Morningstar, chief operating officer at Dynamic Wealth Advisors in Scottsdale, Arizona. Turnover refers to the buying and selling that goes on within the fund. The cost of the trading isnt reflected in posted fund fees known as the expense ratio, but nevertheless they are passed on to investors. An index fund will deliver all the ups and all the downs of the market it holds, but there are investors who may prefer a less exciting ride. There are times where you want to actively control the risk. How much return are you getting versus how much risk? asks David Gratke, founder of Gratke Wealth in Beaverton, Oregon. In some cases, having active management makes sense to control risk. bankrate/finance/investing/how-401k-investment-choices-are-determined-1.aspx
Posted on: Wed, 05 Nov 2014 18:03:58 +0000
Trending Topics
Recently Viewed Topics
© 2015