Actively Managed 401(k)s
An option that may help your retirement efforts.
Provided by Rob Taylor
How should your 401(k) be invested? While some investors manage their 401(k)s themselves, others may seek a different kind of “hands-on” approach: having their retirement plan assets actively and professionally managed.
Why should a 401(k) be actively managed? In a volatile stock market climate, there are potential drawbacks to leaving a 401(k) alone. If 401(k) participants don’t adjust asset allocations in response to market conditions or don’t adjust their investment mix for years, they can potentially lose on their investment. While “buy and hold” can be a successful investment strategy at times, passivity can be equally problematic.
Passive and reactive management can backfire. After years without adjustments, employees may change their 401(k) investment preferences following a bad stock market quarter – but months later, they might miss out on big gains by sitting on the sidelines during a Wall Street rally.
There are two central problems with a DIY management approach: 1) the average employee doesn’t have the knowledge base of a financial professional; 2) the stock market does not move once every three months, but is constantly moving. Investing without monitoring and acting upon changes in the market can have an undesirable result, to say the least.
Many funds offered to 401(k) participants can move with the market; target funds and asset allocation funds may be quite diversified. The problem is that their performance may simply emulate that of the broad market. In addition, passive investing will seldom outperform the market, because the investments involved are directly linked to the performance of stock market indices. In a healthy bull market, many investors can live with that limitation; in a sideways or bear market, many can’t.1
Is there another way? If your goals are to make money in a down or volatile market or to reduce the losses brought on by volatility, an actively managed 401(k) may be appealing. Active investment management uses technical analysis with the twin goals of buying near support levels and selling at resistance levels.
Buy-and-hold investors often prosper in lengthy bull markets, in which the major indices tend to make steady incremental gains punctuated by occasional corrections. Bull markets are characterized by long periods of subdued volatility. Bear markets are another animal: many emerge through significant ups and downs, with institutional investors finally deciding to sell off steadily rather than buy.
A passive, buy-and-hold approach can hurt a 401(k) participant when stocks do sell off; waiting too long to respond to a market slump might be disastrous for a retirement saver, depending on that investor’s goals and time horizon. In contrast, active professional management of 401(k) assets may uncover opportunities for gains amid the volatility and help mitigate losses stemming from sector or asset class downturns.
If you are interested in having some or all of your 401(k) assets actively managed, you may explore this choice without having to obtain permission from your employer or plan administrator. Active 401(k) management can mean higher plan fees, but the fees may be a very small price to pay if the performance of the 401(k) improves.
Ask about this option. While past performance is no guarantee of future results, an actively managed 401(k) may offer you the potential to outperform the market during volatile times.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
DISCLAIMER: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Global View Capital Advisors. LTD (GVCA) or any of its affiliates.
1 - investopedia.com/news/active-vs-passive-investing/ [4/22/17]