The all or nothing decision, in the absence of prudence, when analyzing 401(k) Retirement Plan investment options is a dangerously difficult one. Recently the Motley Fool published an article which listed the 5 investment choices that can “poison” a 401(k) Plan.
The article cites Cash, Company Stock, Emerging Markets, Brokerage Windows and Proprietary Mutual Funds.
Poison, in this case, is in the eye-of-the-observer. Cash serves as a welcome asset class or a safe-haven in a down market. No plan participant ever intends to get rich quick when investing in Cash. During 2008 a cash position was highly preferable to the negative returns of equities and fixed income. If an investor has a long-term time horizon on their Retirement Assets (being at or below age 35) then a cash position always assures the investor of liquidity when stocks or bonds go “on sale.” This strategy is anything but terminal. There is always a need for a cash position when assets revert to fire-sale pricing.
Company stock – could be a poison – if it he company’s market value perpetually deteriorates and plan participants fail to diversify; however, this is a rare occurrence. Dollar-cost-averaging pricing opportunities never materialize in the absence of downside volatility.
A case could be made that excluding Emerging Market investing from a 401(k) investment-lineup is an imprudent decision or an example of irresponsible investment oversight. If 401(k) plan fiduciaries choose to exclude this asset class, they would be well advised to document “the why” around such decision since the future will always usher-in the next Emerging Market bull market.
Brokerage Windows offer relief to the publicly-traded company when plan fiduciaries want to permit access to pre-tax investing in employer securities; while simultaneously maintaining an arms-length relationship between participant access and employer securities.
Excluding all Proprietary Mutual Funds may be a policy – but such a policy could result in the exclusion of high quality investment choices for plan participants.
Knowing how to prudently incorporate each of these potentially venomous investment choices can strengthen a qualified retirement plan and may be preferable to blindly excluding the asset classes because of their moniker alone or public perception.
