But that idea contained a flaw. In the early years, limited choices made it easy for employees. The proliferation of the number of options in later years, however, exposed the lack of sophistication within the employee cohort. That can lead to bad decision-making. Alternative solutions were needed.
Due Diligence
Depending on what the plan sponsor decides to place on the 401k menu, plan participants might have an easier time dealing with making investment choices to battle the ravages of inflation.
It’s not just plan sponsors and plan participants that need convincing. The entire retirement plan infrastructure must also get on board. That doesn’t mean the hurdles can’t be overcome.
It’s not a simple matter of flipping a switch and allowing cryptocurrencies in plans. Because these are alternative investments, the plan sponsor will need to learn enough about them to make an informed decision.
The problem with Sequence of Return Risk is that there’s no way of knowing if you’ll experience it. It’s a roll of the dice. The best way to avoid this risk is to prepare as if it were going to happen.
For all the talk of risk in the academic world, it’s the real world that provides the best answer to what risk really is and how to avoid it. How do your thoughts on this compare with others?
This elegance earned a Nobel Prize for several smart professors. You must forgive them, though, for they had a far limited toolkit to work from. Still, this was the original source from which “risk” sprang.
Today, many 401k plan participants have their retirement savings on “set-it-and-forget-it” autopilot. In a low inflationary environment, that might be OK. However, when the pendulum swings back towards inflation, this can leave them ill-prepared. What, exactly, can a 401k plan sponsor do within its fiduciary capacity to help plan participants incorporate inflation into their retirement planning calculus?
While some may consider this heresy, the best option for a fiduciary managing a portfolio is to include a consistent percentage of assets outside the equity markets and in assets that preserve capital.
Familiarity may breed contempt, but it also makes you sloppy. Do you know plan sponsors that have forgotten they need to address these matters?
