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When Planning for Retirement, Could Less be More?

| January 01, 2016
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The freedom of choice.  For most of us, it's as American as apple pie and the Fourth of July.  As human beings, we crave choice; choice of color, restaurants, movies… you name it.  Unfortunately, as much as we love choice, for some, too many choices may be overwhelming. 

For example, a recent study found that when presented with the chance to choose a chocolate candy from among six different pieces, most agreed that the number of choices was just "about right."  When presented with 30 pieces, however, most respondents agreed that while the wide array of choice was exciting, it was also somewhat frustrating.  Furthermore, those who chose a chocolate from the smaller plate tended to be more satisfied with their decision compared to those who made a choice from the larger selection. 1  

While most would consider the dilemma of too many choices to be relatively inconsequential when one is choosing chocolates, too much choice may be much more serious if it could affect the outcome of how individuals plan and save for retirement. 

More must be better…. Right?

If presented with the option of having many or fewer investment choices in their 401(k) plans, intuitively, many may feel that more options is better; more choice of asset classes and types of securities, as well as more choice of investment providers.  Unfortunately, while some may believe that more must be better, too many choices may cause employees to feel overwhelmed and confused, while others may end up making poor investment decisions simply because they are lacking in knowledge. 

For example, when presented with a large menu of investment options, some employees may simply divide their assets equally across all available options in an effort to diversify their portfolios. 2 Unfortunately, this strategy will likely do little to help a participant reach his retirement objectives as the portfolio will be comprised of a mix of investments that probably have very little bearing on his goals, time horizon, or risk tolerance. 

Additionally, plans with a large number of options may offer multiple funds within the same asset classes.  Inadvertently, this could result in an investor choosing two or more funds in a particular asset class, thereby hindering the attempt to achieve true diversification.  Furthermore, too many choices may cause some to stick with options that they consider to be "safer," either out of confusion, or due to a general lack of knowledge about their choices. 3   

While too many options may result in some employees making poor investment decisions, others may avoid making any decisions at all, or opt out of participating in their plan entirely. 4    Indeed, according to one study that examined the investment decisions of approximately 800 retirement plan participants, a negative correlation was found between the number of investment options that were offered in a plan and the employee participation rate. 5    In other words, the more investment options that were offered, the fewer the number of employees who would actually participate in their plan. Given these findings, it would seem that for many, less may be more.    

Feeling overwhelmed?  Consider these strategies.

While too many investment choices may complicate the process of saving for retirement, and discourage some entirely, we believe there are strategies that can help make saving for the future just a little bit easier.

If offered as an investment option in your plan, consider choosing a model portfolio.  Through model portfolios, employees gain access to professional asset allocation strategies and portfolio construction, as well as exposure to multiple asset classes from both domestic and international markets.   Furthermore, model portfolios can help simplify the experience as they relieve employees of the burden of choosing individual funds from a potentially extensive list of options. With a single investment choice, investors can begin saving in a carefully constructed portfolio that's designed to help them reach their goals. To help investors choose a portfolio, risk tolerance/investment objective questionnaires are typically provided to assist in the decision-making process. 

While a broadly diversified portfolio can offer exposure to many different types of stocks or bonds, over time, the portfolio may stray from its intended allocation due to the performance of the underlying asset classes.  For example, a balanced portfolio may become over weighted in stocks should the equity component of the portfolio outperform over a given time period.  Similarly, equity market underperformance relative to the fixed income component could result in a portfolio that is now too heavily weighted in bonds.

To help ensure that portfolio allocations remain in line with their objectives over time, many model portfolios offer automatic rebalancing.  Through rebalancing, portfolio allocations are periodically reset to their target weightings in an effort to keep the portfolios aligned with their risk/return objectives. Additionally, since rebalancing is automatic, investors are relieved of the responsibility of monitoring and adjusting their portfolios' asset class weightings over time.

While model portfolios offer a turnkey approach to saving for the future, they may not be available as an option in all retirement plans; some employees will still need to build a portfolio from a menu of available investment choices.  If you fall into this category of "do-it-yourselfers," we suggest that, first and foremost, try to avoid becoming overwhelmed with the process and/or number of investment selections. Instead, try to obtain as much information as possible from the resources available to you so that you can feel more confident in your decisions.  

For example, many plan sponsors offer a variety of educational resources to help employees including periodic retirement planning news or communications.  Additionally, some sponsors may offer access to a retirement planning website. Included may be information on the different investment options available, as well as other helpful tools such as educational videos, presentations and articles, and interactive planning calculators.  

Additionally, many plans offer the services of a financial professional who acts as the advisor to the plan. This individual should be able to help you with creating a suitable asset allocation, and choosing the investments for your portfolio. Additionally, he or she may offer on-going planning services and investment education.

We're here to help.

Lastly, if you would like an impartial review of your retirement account, or an analysis of how your retirement portfolio fits within your overall wealth management plan, please feel free to contact me.  I truly appreciate the opportunity to serve your financial needs, and I am happy to answer any questions that you may have. 

1http://fiduciarynews.com/2011/11/avoiding-decision-paralysis-how-to-create-the-ideal-401k-plan-option-menu/

2http://www.seic.com/docs/Institutions/SEI-DC-Poll-Part-2-Defined-Contribution-Trends-6-5-14.pdf

3,4http://www.deanpiccirillo.com/wp-content/uploads/2010/03/Article-401kOptions.pdf

5http://fiduciarynews.com/2013/06/4-proven-strategies-to-reduce-choice-overload-in-401k-plans/

Content written by Symmetry Partners, LLC. Our firm utilizes Symmetry Partners, LLC for investment management services. Symmetry charges an investment management fee for its services. For detailed information about Symmetry Partners' fees and expenses please see Symmetry Partners, LLC ADV Part 2A located on the Symmetry Partners' website, www.symmetrypartners.com . As with any investment philosophy, there is a possibility of profitability as well as loss. Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio.  Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.  Please note that you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Symmetry Partners or your advisor.

Investors should consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. Prospectuses may be obtained from your advisor or from Dimensional Fund Advisors: www.dfaus.com, The Vanguard Group: www.vanguard.com, or AQR: www.aqr.com. For most recent month end performance information, please call Dimensional Fund Advisors at 310-395-8005, The Vanguard Group at 877-662-7447, or AQR at 866-290-2688. Please read the prospectus carefully before investing or sending money. 

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