The Advisor - May 2012


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What to Look for in a Plan

Here are a few things to look for when deciding which plan is better for you. Target-date funds. Does the plan offer low-fee target date funds? These may be a good choice if you want a diversified investment option and don’t want to deal with creating your asset allocation (the way your money is divided among stocks, bonds and more conservative assets) and changing it as your risk tolerance, timeline or goals change. (Diversification cannot guarantee a profit or protect against loss in a declining market.) Target-date funds are designed to be an all-in-one solution. You simply choose one fund with a target date that closely matches your anticipated retirement date. The fund automatically adjusts each year; generally, the farther out the date, the more aggressively the assets will be invested. So, for example, a 2030 target-date fund is likely to have a much higher percentage of its assets in stocks than a 2015 target-date fund. Over time, a target-date fund’s manager will reallocate the fund’s holdings – from asset classes with the potential for higher returns but higher volatility to those with potentially lower returns but also lower volatility. It is important to note that target-date funds do not guarantee that you will reach your savings goals by the target date. Like all mutual funds, the performance of target-date funds will depend on the market.

Diversified core mutual funds. If you prefer to build your own asset allocation, there should be a core group of mutual funds of different asset classes from which to choose. There should be sufficient funds so that you can construct a diversified asset allocation. For example, there should be at least one stock (equity) fund, one bond fund and one conservative choice, such as a money market fund.

Low-fee options. Fees are an important consideration when choosing your investments. High fees will chip away at your earnings (see chart on page 8 for an example). So compare the costs between the 403(b) and 457 plan investments available to you. Perhaps the 457 plan offers no-load mutual funds (funds that do not charge sales fees), but the 403(b) plan does not, or vice versa. Or the 403(b) plan offers passively managed funds, which tend to have lower expense ratios than actively managed funds, and the 457 plan does not. Information about expense ratios should be available at for 403(b) plans and through the plans’ documents for 457 plans.

Online or call center advice or a local agent or representative? Find out if the plan or vendor offers unbiased advice – that is, investment advice that is not influenced by sales commissions that may be paid to the advisor. Some plans or vendors offer online help, such as risk tolerance questionnaires that generate asset allocation models based on your answers. Others may offer phone consultations with a registered investment advisor who is working in a fiduciary capacity. That means the individual is ethically and legally obligated to give you the best advice for your situation regardless of how it affects their own. Plans that provide online or call center advice may be lower in cost because they don’t pay commissions to local representatives.