The temperature hit 60 degrees in Minneapolis yesterday. That fact is all I need to declare Spring in the “Land of 10,00 Lakes.” Minnesota actually has 11,842 lakes of 10 acres or more, but that will be the subject of a future blog post.
Spring has always reminded me of cleaning things out. I learned that habit from my Grandmother. She opened all the windows and doors on her home on the first bright sunny day over 60 degrees.
Some year my Grandmother had to wait until May for her Spring Cleaning event, but you get the idea.
Have you ever thought about a Spring Cleaning event for your company 401(k) retirement plan account? With interest rates rising from all-time lows and stocks trading near all-time highs, this is the perfect time to “clean house.”
In life, things change. In the investment world, things change very quickly. Learn from your past company 401(k) retirement plan account investment management mistakes. Holding on to a nonsensical collection of stock and bond market mutual funds is a recipe for losing a huge chuck of retirement savings in the next great stock or bond market decline.
Stocks will fall from their current all-time highs. Interest rates will rise from their current all-time lows. The combination of both of those events can decimate your company 401(k) retirement plan account balance.
There is an easy option available to avoid the poor mutual fund options that populate the majority of company 401(k) retirement plan menus.
Go online or call your current company 401(k) retirement plan provider. Find out if you have a self-directed brokerage account (SDBA) option available. This “brokerage window” option will allow you to invest in mutual funds, exchange-traded funds (ETFs) and individual stocks and bonds.
Around40 percent of employers offer self-directed brokerage account options. The surprising number is that only 3 to 4 percent of retirement plan participants with access to SDBAs actually use this self-directed option.
The self-directed company 401(k) account will provide many more investment options. These additional options can be a very welcome alternative to the high-cost and poor-performing main menu company 401(k) retirement plan mutual funds.
Many of the target date or asset allocation mutual funds that I monitor on the default company 401(k) retirement plan menus for my clients have lagged the investment performance of lower-cost index mutual fund options.
Access to lower-cost ETF’s (exchanged traded funds) in the self-directed brokerage account can significantly lower your company 401(k) retirement plan account annul costs.
For some individual company 401(k) retirement plan participants, the myriad of options available in a self-directed brokerage account is overwhelming. The knowledge and experience of an independent, third-party, fiduciary level investment advisor many be valuable.
It is also very important to understand the investment management risks and costs of a self-directed company 401(k) account. There are always additional fees and expenses to consider.
In most cases, you will find lower annual mutual fund expenses when you go outside of your core company 401(k) mutual fund menu. This is especially true with ETF’s.
Unlike a company 401(k) mutual fund, an ETF can be used with a stop loss. That is, you can limit the dollar amount or percentage you are comfortable losing in the event of a dramatic rise in interest rates or a meaningful stock market decline.
The early stage of each event has taken place over the last few weeks. Spring Cleaning your company 401(k) may help prevent long-term damage to your company 401(k) principal at a later date.
Ric Lager
Lager & Company, Inc.
