The other day I was asked if I would take a look at a family member’s 401K allocations. Nothing major, but they just wanted some clarification that they were investing appropriate to their risk tolerance.
No problem. This should be simple I thought, I can compare their portfolio rate of return for 2017 against some benchmarks, ask them a couple of questions about their tolerance and then make a few suggestions regarding balancing.
So we logged in. The first thing I noticed was that although there was a headline portfolio value on the front page there was no rate of return. So we looked around to see if we could find it. Eventually we noticed a link that said “Portfolio Performance”; clicking this brought us simply to a splash page. OK, not ideal but we could at least look at each individual fund and see those rates of return and also see the headline make up of those funds. We could work something out.
Although the relative was invested in 5 different funds there was no information on any of those funds regarding performance. In fact there wasn’t even any information on what those funds were actually investing in. Each fund literally had just a set of codes next to them like “FID BAL EQU” which we took to mean was a Fidelity Balanced Equity Fund. We then had to literally google “Fidelity balanced equity fund” to find information on the fund (and hope we got the right one!). We eventually were able to do this for all the funds invested in order to get a rough idea of what the person was invested in, and how it was doing.
The next step was to look at their investment options and see if we needed to re balance or invest slightly differently. So we clicked the “Change Investments” button. This brought up a list of *39* different funds. Again none of these had any links to portfolio information or rate of return. What this meant was we would literally have to google 39 different funds to determine their make up and get some visibility as to whether they were worth investing in. We gave up at that point as it would take several hours to do this exercise. Now, you might argue that spending a few hours to get some visibility on your financial future is not an unreasonable investment of time. A fair point, but I think financial institutions have a responsibility to make the investment decision as simple as possible. In reality no one needs 39 funds; if a 401K offered say the following funds it would probably cover 99% of all employees needs.
- US Stock fund
- International Stock fund
- Emerging market fund
- Bond fund
- Low risk treasury fund
- Multiple target date funds that re balance the closer you get to retirement.
The last issue we came across was that there was no way to determine the amount of fees paid on the 401K account. Maybe it was buried in the small print somewhere but it wasn’t obvious.
In the end I advised that the person should contact the plan administrator directly and see if they could furnish the information we couldn’t find.
My feeling was that this 401K had been set up in an over complicated way that made it tricky for the client to see exactly how they were doing against benchmarks and to make informed decisions. This was a reputable company and I suspect that what they wanted was for the clients to discuss directly with their team what they wanted to do rather than letting them do it themselves. However this stymies the acquisition of knowledge and stops people becoming more confident in their abilities to make financial decisions.
So if you have a 401K today.
- Can you easily find your personal portfolio performance?
- Is that performance easily measurable against various benchmarks (S&P 500, NASDAQ etc?)
- Are the funds you invest in providing clear portfolio information?
- Are the funds available to you appropriately diversified? There are still many companies that encourage their employees to invest their 401K in company stock, a classic case of putting all your eggs in one basket.
- Do you know or can you find the administration costs of your 401k?
- Are you encouraged by your HR department to review your plan yearly and re balance as appropriately?
At the end of the day the 401K is probably the most common window on the investing world out there. It is worthwhile to everyone to have clear concise information and to, as the saying goes, Keep it Simple Stupid.
The result otherwise is for smart people like my relative to think they are financially illiterate and will never understand investing when the reality is that only a financial professional could reasonably make the decisions required within the framework they were given.