Blog Article

The Importance of Integrating Your Retirement Plans into a Household-Wide Allocation


By Geoff Curran, Wealth Advisor CPA/ABV, CFA®, CFP®
Published On 11/09/2017

For many households, their workplace retirement plan(s) are a large and important part of their retirement nest egg. These retirement plans represent anywhere from 10% to 100% of one’s retirement savings. Since for many families it represents greater than 50% of their retirement savings, how your retirement plan is invested has a big impact on your ability to reach your financial goals.

If, for example, your retirement plan is invested too conservatively in bonds and stable value mutual funds, you may not be exposed to the fluctuations of the stock market. However, you’re at a greater risk of not growing your account to meet your inflation-adjusted spending needs in retirement. Similarly, if invested too aggressively in, say, all small company stocks, your investments may be exposed to more stock market risk than your retirement spending plan requires. Often households invest their workplace retirement plans in a generic mix of stock and bond mutual funds or default into the target date retirement fund that most closely matches the year they turn age 65.

When creating a retirement spending plan, whether on your own or with an advisor, the asset allocation (mix of stocks and bonds) required to meet your goals is something you can control, which has been proven to have the greatest impact on your results. If you have investments outside of your employer retirement plan, such as an individual retirement account (IRA) and/or a taxable investment account, these accounts should be coordinated with your employer retirement plan.

By incorporating your retirement plans into your overall allocation, you can pick the best investment options available in your retirement plan and manage your wealth like it’s one portfolio, instead of viewing accounts separately.

Benefits of viewing all your accounts as one portfolio can include:

  • Proper alignment of portfolio with your retirement spending plan – Your retirement spending plan may require that you have 60% stocks overall; however, you are currently weighted at 50% stocks due to a retirement plan being invested in a conservative (heavily in bonds) allocation. By managing them as one account, you can either overweight stocks elsewhere to match the 60% stock target, or rebalance the retirement plan.
  • Greater diversification and reduction in concentrated stock positions – Rather than having identical portfolios (cookie cutter approach) that have a lot of overlap, which dampens the benefits of broad diversification, have the proper amount of each asset class in the most optimal account type. Also, many investors still own a considerable amount of their employer’s stock in their retirement plan. This means that they have their human capital (employment) and a considerable amount of their financial capital tied up with their employer’s prospects.
  • Closing the behavior gap (reduced performance chasing) – When managing your wealth as one overall portfolio, there’s less likelihood of performance chasing and poor decision making because you aren’t managing each account differently and/or toward a different objective.
  • Rebalancing between all your accounts – In many cases, most people choose an allocation for their retirement plan and don’t rebalance the account for years. Over time, this can lead to investments being overweight and underweight related to their targets. By viewing your accounts as one, you can reduce rebalancing across your entire portfolio to the target allocation.
  • Reduce investment expense ratios in retirement plan – Many employer retirement plans are full of actively managed mutual funds that carry higher expense ratios. By viewing your accounts as one portfolio, you can pick the lowest cost options in your 401(k), such as the index funds that match what your asset allocation needs. This reduces your overall investment expenses.
  • Reduced trading costs – By operating all your accounts as one, you end up significantly reducing the number of positions you hold in each account. Since you have fewer holdings because you are viewing all your accounts as one to reach your target allocation, you’ll end up requiring fewer transactions when rebalancing.
  • Increased tax efficiency – This allows you to prioritize placement of investments that are not tax efficient, such as real estate (REITs), into retirement accounts and tax-efficient investments like municipal bonds in non-retirement taxable accounts. Also, international stocks can be prioritized in taxable accounts to allow you to deduct foreign income taxes paid on dividends received.
  • Better exposure to international small stocks and emerging markets stocks – It’s unusual for employer retirement plans to have very good international small stocks and/or emerging markets stock funds available. Since these asset classes have benefited returns over time, they can be over weighted in other accounts, such as your taxable investment account, to receive the foreign tax credit.
  • Ability to overweight value, small and profitable stocks elsewhere – Even if your retirement plan doesn’t have good options, by having the account invested in, say, a large cap index fund, it allows you to overweight other accounts where you have more flexibility in investment options to parts of the market such as value, small and profitable stocks that have been proven to provide excess return over the long term.
  • Performance reporting in one place – By integrating your retirement plan into your overall asset allocation, there are services that combine reporting for all your accounts so you can easily monitor and track your overall asset allocation and performance in one place.

Here at Merriman, we integrate employer retirement plans into clients’ overall allocation. We believe this will enhance their overall return, increase diversification and properly align their investments with their retirement goals.

We suggest speaking with your advisor about how to incorporate your employer retirement plans into your overall investment allocation.

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By Geoff Curran, Wealth Advisor CPA/ABV, CFA®, CFP®

Geoff has always enjoyed talking with people about finance, learning about their investments, financial strategy, and business sense. His interest only deepened with time, and what began as a hobby has now become a life-long passion, with an unparalleled passion for continuing education that makes him an expert in many subjects from traditional taxes and investments to business succession planning and executive compensation negotiations.

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