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Random investment selection and...

Random investment selection and...

| April 20, 2024

I was reviewing an employee's 401k portfolio during a recent Zoom. The investment selection seemed to be a bit all over the map with over-concentrations in some areas and duplications in others. As financial professionals, we preach (proselytize?!) asset allocation and diversification. The employee sheepishly admitted he had simply randomly chosen investments.

I was able to explain investment fundamentals to the employee and he was merrily on his way. But it made me think about the new push towards retirement income in 401k plans. As discussed in prior articles, this push seems to involve various investment options that are designed to pay income in retirement. Some of these options look like annuities.

As I contemplated the employee's random allocation, I wondered what would happen if he had randomly allocated to a retirement income investment. As my fellow advisors know, if a client agrees to purchase an annuity, there is a fair amount of documentation and "justification" needed for that purchase to be approved by Compliance. What documentation would be needed in the 401k space? How would a 401k advisor even be aware of the random allocation to the retirement income investment?

My mind then turned to possible conflicts of interest. I have heard 401k providers state they will reduce their fees to the plan sponsor if the sponsor will agree to use some of the provider's investments. I avoid these types of arrangements. I run the plan solely in the interests participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses (the Department of Labor's Exclusive Benefit rule and Duty of Loyalty). The "fee reduction" arrangement smacks of a potential conflict of interest.

With that in mind, how would it be suggested that an advisor weigh the potential benefit of a retirement income solution in a 401k with the potential fee and possible cost saving? I must admit my mind was awhirl on this topic.

As I said before, beware of the new shiny object. Retirement income in 401k is getting plenty of attention. Doing your research and asking tough questions will be essential.