The basic rule of the office jungle is that the experienced, seasoned folks have the wisdom, while the youngsters are valued most for their energy and potential.
Funny thing is, when the topic turns to how to invest your 401(k) money, it’s the young ‘uns who might have something to teach the old folks. Financial Engines, a retirement advisory firm sized up the allocation acumen of nearly three million 401(k) accounts in its database to see how well folks are spreading their money across different types of investments to manage risk and reward.
CHART: Percent of 401(k) Savers Getting a High Mark for Asset Allocation
Advantage newbies? Maybe.
What’s going on is that a 2006 federal regulation allowed 401(k) plans to automatically enroll new hires in the company 401(k) and to also automatically put those new accounts into the plan’s target retirement fund, if the plan offered such an investment. (Most do.)
As you probably know, target date funds (TDFs) are a one-stop option that provides instant age-appropriate diversification, Moreover, once you’re enrolled in the TDF you are also going to get instant-rebalancing as well. The folks running the TDF have a formal allocation model to follow and periodically the manager will take a look and make any changes necessary to make sure the allocation stays true to the model.
So it’s not necessarily that the young turk in your office is smarter than you, or some freakish retirement planning savant. Maybe yes, maybe no. But a lot of younger employees get higher marks on the allocation front because they are choosing to let the TDF make all the decisions.
There’s one important caveat to mention. Financial Engines is only looking at the 401(k) assets held by a plan participant in its database. What could be going on is that older employees have other retirement investments outside of this particular 401(k). They might have a 401(k) or two from another job, or IRAs, or straight-up taxable accounts as well. So maybe it’s not that the older folks are screwing up their retirement allocation, but rather that they have a well thought out allocation strategy that works across all their investments. What looks like a poor job of allocation in their 401(k) could make sense when viewed as just one slice of their entire retirement investing pie.
But that’s just me being generous. Fact is, plenty of older 401(k) participants are not optimizing their allocation strategy. One piece of evidence, is the fact that older employees tend to have a way-too-big piece of their 401(k) riding on company stock.
I’m not suggesting a TDF is the best way to go. If you want to have more control in how your 401(k) money is allocated, that’s your call. But if there is in fact a TDF in your plan, you should take a peek at the portfolio that dovetails with your age. Compare its allocation to what you’re doing. Maybe you have a really well thought out rationale for any instances where your allocation is far afield from what the TDF is doing. Or maybe there’s something you can learn from the TDF. It’s well worth a look. And if you’re working with a financial advisor, I’d go through the same exercise; it’s always good to have an ongoing conversation about how your money is allocated. You can use the TDF allocation as a launch point for having that important chat.