What Are The Best Investment Options In Your 401k Plan?

This is a common, simple yet incomplete question. The proper question, put in its true perspective should be ‘what are the best investment options in your 401k plan ~ today?’ All too often, the average 401k investor is called upon and led to believe that investment decisions are a singular event.  It is not dissimilar from the decision to select a primary care provider from the menu of physicians offered in the company health care plan. Set-it-and-forget-it seems to be the default option in this space.

This attitude is reinforced by the creation of the ever-present pie-chart offered to most 401k plan participants.  This tool, I believe, is a most effective selling aid; however, far too little education and consumer understanding accompany the presentation. This lack of education and understanding has created “sales” but at the cost of unrealistic expectations as well as realized and unrealized losses in most 401k participant accounts.

The assumptions incorporated in these computer generated investment models begin with collection of data points (returns, correlations, and variances) on a variety of asset classes over a period of fifty to seventy five years. Those data points are then converted into stationary data points.

It is important to recognize that these “stationary” data points are averages. In truth, the model is asking you to believe that an average return, for example, will be constant for the next five, ten and twenty years. Has anyone ever told you that this has never happened at any time in the past?!

Perhaps the answer is your best investment options are dynamic. You would be well advised to select your investments accepting the fact that conditions change. I believe that as important as investment selection is to a 401k plan participant, an established process to regularly monitor your investments and a willingness to make prudent adjustments are equally important.  If you do not believe that you have the time or talent to do this on your own know that there is a growing trend of professionals willing to stand as a Fiduciary to give you 401k investment advice.