Michael Carlin

Hi this is Michael Carlin president of Henry+Horne Wealth Management with your manage the funds podcast. Today like everyday we’re going to tackle a topic that’s near and dear to my heart. How do I allocate my 401K. I get this a lot a lot a lot a lot. We have thousands and thousands of 401K participants that we work with and we see the struggle in their eyes when we meet with them and they say I don’t know what to do. And for many people.

401k is one of their most important financial assets that they own in the fact that they don’t know what to do with them.

And there’s a decreasing amount of professional help and expertise in managing these critical assets. I felt the need for us to put this podcast out to help you the listener allocate your 401K.

So I say when I say 401k think of any kind of retirement plan I realize that if you work for a hospital you may have a 403 b or you may work at a smaller employer that has a simple IRA. So if I say 401K just know that means any kind of corporate retirement plan.

So when we’re looking at this 401K, this retirement plan market how big is it.

As of December 31 to 2018 there were twenty seven point one trillion dollars in U.S. retirement assets. Wow.

Twenty seven point one trillion. That’s a huge huge number. And if you if you look as if a couple of years ago there were fifty five million American workers that were active in their 401K retirement plans and there were more than five hundred and fifty five thousand 401k plans across the country this came from the Investment Company Institute Federal Reserve Board and Department of Labor. Got a source this information every once in a while. I can’t just whip out autistics like that without giving you where it came from.

I’ll get in trouble. So 401k market the retirement flea market is huge. We want to make sure that those twenty seven point one trillion dollars of assets are being managed correctly. Why don’t we look back to see when we look at the management of these investments to see how people were doing let’s go back to 2008 the financial crisis. What we saw there was some really good research done by the same institutions that I just mentioned that looked back to 2008 looked back into the 401k marketplace and we went to see what people did.

We saw they saw the research showed that most 401k participants did not make changes very often even during the financial crisis. A study done by the Investment Company Institute showed that 22 million participants found that in 2008 that 3.7% of them stopped contributing only 3.7%.This is the worst financial crisis that virtually anyone who is alive today has seen and more than 96% of people this continued to put money away. Week after week paycheck after paycheck which by the way is exactly what I would recommend that you do.

People were doing it. A lot of that has to do with the fact there’s something called inertia. I mean again they continued to go with this behavior because they were already doing it. It’s one of the beauties of retirement plans. So let’s learn from 2008 during a time of significant financial crisis and strife do what everyone else was doing in the retirement plan world continue to invest. Those that did ended up largely performing well again as long as they stayed the course. Just a lot of disclaimers and disclosures there but they did exactly what we would want them to do continue to put money in. Most plan participants maintain their asset allocations same study. You know what we saw is that you know 12.4 or 12.5 percent changed their contribution investment mix fourteen and a half percent changed the asset allocation a bit the study gets into more about what a bit means but what you’re learning is that most people did not change their allocations.

Most people continue to invest.

Ideal investment behavior so we saw in 2008 people investing in their 401k just the way we want them to keep your head down, buy as much as you can when the market’s dislocated and continue to hold on for the long term because let’s keep in mind when you’re dealing with a retirement plan.

These are assets that are set aside until you’re 59 and a half. That’s after 59 and a half. You can access them without a penalty. Understand that if you’re getting a deduction on the money that you put into these retirement plans you’re going to pay income tax on the way out. That’s a whole different story. But just know these are long term assets in a retirement plan take advantage of market dislocations.

Try not to overthink things.

There’s also a study the same study went on to review how often plan participants changed their portfolios today. So they looked at 30 million accounts in 2018 and found that one point four percent of participants stopped contributing. So very few can stop contributing in 2008. Fewer stopped in 2018. That’s probably again my estimation average because people’s financial circumstances change people’s incomes change they change jobs. There may be a lot of reasons why people stopped contributing to their 401k plan. So I’m not alarmed by 1.4%. 7.1% the people with retirement plans.

30 million changed their asset allocation change the way that they invested their money which is to say that most people continue to do what they were always doing just kept their head down get their money invested. 4% changed the asset allocation to new contributions again. Very few changes there.

Here’s the most interesting thing that I found the research released as part of the Employee Benefit Research Institute and the ISI participant director retirement plan data collection project.

It’s the largest study ever done.

So if you look at the performance that these people experienced between 2010 and 2016 their accounts increased at a compound average annual rate of that six year period of fourteen point two percent which is about doubling your account balance completely. Ideal investment behavior with great results. Now granted the market was was particularly good but you got to be invested in it and stay consistent in order to realize those results. I’m happy to say that the results have been good.

So I just want to make sure we touch on this. So does that mean I’m not supposed to do anything with  my 401k investments. Does that mean I just always leave it alone. I don’t change anything. What I’m saying is that alarmingly for most that will work well. I would prefer that you pay a little bit more attention. You do make changes is that you are putting more money in when the market’s down you’re making those contribution changes. I would want you to be a little bit more aggressive when the market’s down as long as you have a long term time horizon.

I would want you to be a little bit more conservative if we’re getting closer to retirement. There are allocation changes I would want you to make based on your circumstances that are going to be unique to you. I would love that. I realize that not many 401k plan participants or retirement plan participants in general are doing that but I encourage you to to make that happen. So what are some of these typical investments inside these retirement plans. About 64% of 401k plan assets were held in mutual funds.

Again we did a whole podcast on mutual funds you can listen to it. We break down what they are how they work.

Just know it’s a diversified single investment that will tell you specifically how they’re investing the money could be invested in international or small U.S. or large U.S. as a whole bunch of different ways to invest your money in a mutual fund has a full copy available for you.

I understand that you’re for one key plan your retirement plan is going to have a good investment lineup where they’re going to say here are the specific investments you can choose from that’s going to be different based upon who your employer is and what they’re trying to accomplish with their plan. The remaining 401k plan assets you could have company stock which is by the way next in mutual funds the second most popular investment individual stocks and bonds we’re seeing that so much less frequently gets her guaranteed investment contracts which are like money markets they’re very common.

We don’t normally want people to use guaranteed investment contracts or money markets inside of our retirement plan unless you’re really worried about the market the economy or you’re really close to needing some of that money. Otherwise over a long period of time. Cash is usually something that doesn’t grow much greater than inflation.

So with that we’re taking a look to see well how do people normally allocate there for one case or their retirement plans and that what we’re seeing is that on average 67% of 401 K assets are invested directly or indirectly in stocks in those those the most volatile areas of the market. Again for a long term assets 67 % might be OK if you’re 70 and you’re going to be retiring next year 67% in the stock market might not be for you if you’re 20 and you’re not going to be touching this thing for you know another 40 years.

67% equity might be a little late for you maybe you don’t like the way the market is right now maybe feel like it’s too high and you’re young and you want to take a little bit less risk again your situation is going to help dictate how you need to allocate your investments. What I found interesting is that only 20% of total for one key plan assets and of course a study that was done by the FBI and I see I keep quoting this source over and over again it was done as of 2016 and only 20 % of the assets were invested in target date funds target date funds are kind of that one investment that doesn’t all. What you do as a 401k planner or a time or plan user you say well I’m going to retire in the year 2050 or you think roughly it doesn’t have to be perfect. If you’re gonna retire at that time you can pick the 2050 target date fund that’s going to allocate your investments between risk high and risk low assets blend them all together and then over time manage those assets for you so that you’re maximizing your allocation given your age and how close you are to needing the money.

We see we have plans where there’s 60 70 80% of plan participants have target date funds because we do typically in the cases where we know we monitor the funds and we make sure that they’re performing great performance is what we have seen. And I would encourage you to look at targeted funds because it gives you a really well balanced approach to investing. It could be one fund that may be able to do it all for you. If you’re not going to look at your 401k allocation often and if you’re not going to be making investment changes maybe you don’t want to get into buying a health care fund and a real estate fund in small cap value fund. You want to really try to figure out and pinpoint the right time to get in and out of those particular investments.

You may not want that level of effort or hassle on an ongoing basis to manage your investments where a targeted fund can take care of some of that for you. I talked a little bit about asset allocation again how you’re spreading your assets out and it’s going to vary by age. I’m happy that participants in their 20s the average I’m sorry. Well if people who had more than 80% of their money in stocks in their 20s. 75% of people had more than 80 percent of their money in stocks.

Perfect. Excellent well done. Good job people in their 20s. People in their 60s, only 20% of plan participants in their 60s have 80% of their money in stocks. What’s interesting is that people in their 60s there was 12% of them had zero in stocks. They must be really worried that the market and economy are coming to an end. That study was done in 2016 and those people who had 0% of their money in stocks and that was by the way twelve point seven% of people in their 60s and 7% of people in their 20s had zero in stocks missed a heck of a 2017.

Yeah. You missed a slightly negative 2018 but you missed it how accurate 2019 too. So again think about the long term understand how long you need to be investing this money for and think big picture because when you’re talking about allocating your account the number one factor in my opinion is going to be your age if you’re not going to use this money for 40 years if you’re not going to use it for 10 or 5 or 1. That’s going to help dictate how much risk we can take. How many market cycles are we going to have.

How many economic recoveries might we see. Number two we’re going to want to consider your risk tolerance. Just because you’re in your 20s doesn’t mean you need 100% stocks. It’s just not for everyone. People don’t like some of the volatility in some people who are going to check it actively may not want that kind of up and down. So if you take a risk tolerance test or if you really think about it and you really hate losing money and you’re in your 20s and maybe you shouldn’t have 100 percent equity exposure and go something less.

But seeing you need to have that as a consideration because what we do is we want you to be invested. In the beginning. We want you to stay invested and stay consistent. Number three. Consider your investment options. Not every retirement plan is invested the same. Not ever a time plan as a same lineup of investments.

Maybe you only have target date funds. Maybe you have company stock. Maybe you have 50 mutual funds to choose from maybe you have five. Look through your investment options because once you’ve done your age and your risk tolerance your investment options start to see a clear picture about the best funds that may be available to you. Then be honest with yourself.

How active are you gonna be investing your money. If you’re going to set it and forget it. Then you may not want to have a lot of funds. You may not want to end up with some kind of really unique allocation. Maybe a target date fund alone is good for you but when you’re making a decision with those four factors in your and you’re having a good honest moment with yourself about what’s important to you what’s important for your family what’s important for the long term well-being of your portfolio.

You’re going to be able to uncover the right allocation for you and if you need support you can certainly reach out to us.

There are certainly other resources that you can reach out to but you want a proactive allocation that’s going to in our view be suitable for your expectations suitable for your lifestyle suitable for how much longer you’re gonna work so that when you need the money it’s there it’s available and you’ve had for long term financial success.

So with that I complete the how do you allocate your forward cash allocation podcast. If you have any questions feel free to reach out to us. Otherwise thank you for listening. And have a great day.

Material on this program is intended for general information only and should not be taken as specific investment tax or legal advice. None of the information contained in this broadcast is intended by the host to be a solicitation for sale of any security. Further information is available by contacting Henry+Horne Wealth Management securities offer through independent financial group member of FINRA SIPC advisory services offered through Wealth Management LLC DPA Henry+Horne Wealth Management a registered investment advisor. Henry+Horne Wealth Management IFC are separate and unrelated entities Henry and Horne and Henry+Horne Wealth Management are separate entities.

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