Thank you Chris Costello, Founder and Co-CEO of Blooom for your great insights on the 401(k) Fridays Podcast! If you have not listened to the episode, click below.
Ok, now for this installment of the 401(k) Fridays Fiduciary Fact and Folly.
First, let’s start with a fact. During our conversation, Chris mentioned at different points and in different ways that the average investor left to their own devices generally underperforms the broader markets. For the sake of conversation, let’s just focus on how the average investor did versus the market. Blackrock released a study in early 2016 showing that as of the end of 2015, if you look back over the past 20 years, the stock market, represented by the S&P 500 has returned just over 8% annualized, Bonds as represented by the Barclays Aggregate Bond index have returned over 5% annualized and the average return for individual investors as measured by Dalbar, is just over 2% annualized. So, if you had a hypothetical participant that started 20 years ago with $50,000 in their 401(k) plan, made no additional contributions and they earned the above mentioned average rate of return, they would have roughly $75,000. For a simplistic hypothetical comparison, in bonds they would have had over $140,000 and in stocks they would have had over $240,000. To finish that thought off, the rate of return earned by the average participant did not exceed the rate of inflation over the last 20 years. So to add one more disturbing component to this mix, the average participant as measured in this study, actually would have less purchasing power now than when they started 20 years ago!
Whether you believe this specific study or not, the fact patterns of this and many others are clear, the average investor left to make their own investment decisions and struggle with their emotions, has not fared as well as the broad markets, and it is not even close.
For employers, I would argue that it is not your job to tell your participants how to invest. I would however argue that as employers, you should provide a basic asset allocation strategy for your participants who are not comfortable making their own investment choices or, would just prefer someone else handle their investments. On a prior podcast we talked about Target Date Funds and Three Key Pillars to evaluate them, on this podcast, we talked about managed accounts. These are the key strategies being used by 401(k) plans to offer participants an easy way to allocate their retirement savings in a way that, if appropriately selected and monitored, should give both plan fiduciaries and plan participants confidence.
I don’t have a dog in the fight here on which path your choose or which provider you select, however, with all of the information, tools and resources at the finger tips of employers, it is folly to leave your participants to make complex investment choices on their own.
If you would like some more personal support on selecting an appropriate asset allocation strategy for your participants and your plan, or would like to further explore the pros and cons of managed accounts, send an email to firstname.lastname@example.org. There is no pressure and no commitment, and who knows, we might be able to help!