Some QDIA's Risk-Control Strategy Better Than Others
February 1, 2009
Financial publications are filled with stories about the devastating blow dealt to pre-retirees by the recent 30 to 40% drop in many 401(k) accounts. Even 2010 target date funds ostensibly aimed at more conservative asset mixes to protect the accounts of near-term retirees experienced losses of 25-30% last year.
One thing is certain: if money management pros cannot prevent this kind of beating, individual participants directing their own accounts are hopeless to do so themselves. The stock market has averaged 12% a year for the past twenty years. The average investor has gained 4% in the same time frame. Most 401(k) participants, as 'average' investors, do not have the knowledge, time, discipline or emotional objectivity to manage their own money. Nor fix their own cars, take their own cases to court, or perform surgery on themselves. Specialists are as important to retirement health as doctors are to medical health.
The answer for retirees and pre-retirees concerned about gut-wrenching drops in the value of their retirement accounts may be to find professional money managers who aim to capture most of the good times while missing most of the bad times accentuating reduced risk in during tough markets, and growth in better ones. Over the last 15 months, the market has (once again) taught us the value of prudence. Missing most of the bad times not only means losing less, it means less ground to make up in the next upturn.
Take Pat and Mike. Pat uses an investment strategy that mimics the stock market. Chris uses a risk-adjusted strategy to protect assets and provide modest growth over time. When the market nose-dives, so will Pat's assets, but when the market improves, Pat's assets will potentially see significant gains. Chris, however, with fewer losses, could pull ahead of Pat's returns in the long run even though Pat's gains were greater in prior good markets. The risk-adjusted model that Chris' investment manager employs is based on science and discipline. It not only intends to deliver better results over time, but is designed to produce a smoother ride along the way.
How does that translate to today's market challenges? Chris can likely retire on time because his portfolio did not take a big hit, while Pat, if he faces retirement soon, may need to delay retirement and work longer to replace assets in his retirement savings as the market slowly improves.
One company that provides the service that our hypothetical Chris might prefer is 401k Toolbox, an award-winning advisory service that is approved as a Qualified Default Investment Alternative under the 2006 Pension Protection Act. QDIAs provide professional investment services to individual 401(k) participants within their company's 401(k) plan. For a modest $75 on $10,000 per year, 401k Toolbox not only assumes the burden of making investment decisions for the participant putting those decisions into the hands of professionals who prioritize protecting investments in volatile markets but staffs a team of retirement specialists who can help participants define their personal retirement objectives and make decisions that will help them reach their goals.
This kind of personalized service and risk-controlled investing may be the perfect combination that can help today's plan participants properly plan their own futures. Getting professional help may also overcome fear that might cause them to exit the market at just the wrong time, potentially damaging their chances to benefit from the kind of future growth necessary to achieve their long-term goals.
For further information, Tim McCabe, Senior Vice President, 401k Toolbox -- 800-222-7636. tim.mccabe@401ktoolbox.com.
Trends from Ink&Air --Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com , 508-479-1033