College Football & 401k

After watching THE Ohio State Buckeyes take care of business against the Oregon Ducks in the national championship game, as an Oregonian, I was disappointed that Oregon did not have a better showing. However, I was pleased that a better playoff system was in place that provided fans with the two best teams in college football putting it all on the line. A little background for those non-college football fans: 2014-2015 was the initial year of a playoff system that allowed a third party panel to select what they believed to be the four best teams based on analytics and the human eye test (watching the games). The four teams competed in a playoff to determine who the best team in college football was this year. This was much improved from the previous Bowl Championship Series (BCS) system that left college football fans wanting far more clarity, and relied heavily on numerous rankings that utilized very subjective data. The point being, in the BCS system, the college football landscape was looking at information. But maybe it wasn’t the best information.

In a way, this got me to thinking about how retirement plan participants select funds in their 401(k)…. often times using highly subjective data and not the best information. So, in honor of the college football playoff, it’s out with the old and in with the new! Let’s look at three ways to help you make better decisions when selecting an investment in your 401(k) plan:

Short-term performance can be misleading.

While short-term performance history does provide some information regarding the fund you are selecting, what’s more important is how asset classes, US Stocks and US Bonds for example, perform over time and applying that knowledge to the fund you are selecting.

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Understanding how an asset class can perform over a long period of time and the best and worst case scenarios (as shown above) help provide context when selecting an investment. For example, imagine it’s January 1st, 2009 and your retirement account just lost 35% in 2008. All the “noise” was telling you to get out of the market, due to what was happening in the short term. However, if you understood the ups and downs of the stock market and kept your account invested in equities, you benefited by potentially returning a cumulative 105% over the next six years (2009-2014)! All that to say, it’s worth evaluating how markets perform over the long term and not relying on short term information when making investment decisions. Even though we all have heard it a thousand times, it’s always important to note that past performance is no guarantee of future results.

A dollar saved is a dollar earned.

In a recent study, one out of every five 401(k) participants believe they do not pay any 401(k) related fees! There is a very high probability (like 99.9% high) that you are paying fees in your retirement account and it’s definitely worth looking at how much you are paying. If you are utilizing a fund that has an expense ratio of 1.00% or more there is likely an index fund that can accomplish the same goal and reduce your costs. In other words, there are potentially tens of thousands of dollars in savings over the course of your working years if you are able to reduce the costs inside your retirement plan. Need I say more?

Utilize “Set it and Forget it” Investment Options.

Whether your retirement plan offers Target Date Retirement Funds, Constant Risk Models (i.e. Growth, Balanced, Conservative) or both, it’s worth looking into if a “set it and forget it” investment option works for you. For many people, this approach will allow you to be diversified among multiple asset classes, manage your risk, and reduce the time spent managing it yourself.

So whether you want to re-examine how you’re choosing your funds, dig into any hidden fees, or consider consolidating into a “one stop shop” type of investment, we’d be happy to discuss these ideas with you. As a team, we want to make sure you feel well-equipped to make investment decisions, using the best information rather than flipping a coin or using some advice you heard from a friend of a friend (of a friend?). After all, whether you’re a Buckeye, a Duck, or prefer a different mascot, we all want looking at our retirement accounts to feel like winning the National Championship.

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RetirementAndrew Nelson