Quick Start: 401k and 403b Plans

 

This is a Quick Start guide for investors interested in following one of our Model Portfolios in an employer-sponsored 401k or 403b plan. You should read this guide in conjunction with the Quick Start guide provided for the specific Model Portfolio you are interested in.

The 'Benchmark Series' Model Portfolios: Two of our Model Portfolios are specifically designed to be followed within the context of a 401k or 403b plan. These are the Conservative Portfolio and Growth Portfolio models which can be followed by subscribing to the Benchmark Series newsletter. They operate within a limited universe of investment fund options that are typically found in most employer-sponsored plans.

You might have a 401k plan that offers you access to a very large number of different investment fund alternatives. If that is the case, you might be able to follow the Performance Xtender model portfolio which includes a greater variety of investment fund types, including sector funds. While most 401k plans do not offer these types of funds, yours might. You will need to do the research to determine whether it would be possible for you. (Note: We would not recommend following our Max Xtender model within a 401k or 403b plan because it is too risky).

We presume that by now you have figured out which one of the Model Portfolios you want to follow in your own investment portfolio.  If you haven’t yet, try reading “Which Strategy is Best for Me?” and consult with a licensed investment advisor to determine which Model Portfolio, if any, is most suitable for your situation.

Determine Your Portfolio Strategy

For any number of reasons, it may be appropriate for you to dedicate only a portion of your total portfolio to a particular model portfolio strategy; and you should consider whether a different portfolio strategy might be appropriate for your 401k plan than for other components of your total portfolio that you may hold in an IRA account or taxable brokerage account. And you or your financial advisor may determine that it would be appropriate to only use our recommendations as input for an investment strategy of your own design.

Split Your Portfolio:   Many investors may find that it makes sense for them to follow different Model Portfolio strategies for different parts of their overall portfolio.  For example, a higher net worth investor might follow the Growth Portfolio for recommendations on managing his or her 401k plan at work.  Then, they might follow the Performance Xtender for most of their remaining financial assets.  And, a "sub-allocation" of 15% of their assets could be dedicated to the Max Xtender strategy which is much riskier but also capable of boosting the blended overall return on a total portfolio.  In addition, the same investor might follow the Conservative Portfolio to manage a trust account holding the assets of an aging parent.

Again, your own individual circumstances must determine the proper utilization of any of our Model Portfolios in your portfolio. Since we don't provide individualized investment advice, we recommend you seek the guidance of a licensed financial advisor.

Review Your 401k Plan Investment Alternatives and Policies

If you intend to use our newsletter to help you manage your 401k plan at work, then your employer-sponsored account is probably already open. 

401k and 403b Plans:  Before getting started, you should review the policies and investment fund options in your employer-sponsored plan and determine how they match up with the investment choices included in our “Benchmark Series” strategies--the Growth Portfolio and Conservative Portfolio.  We have designed these two strategies to incorporate the investment fund options that are found in a majority of 401k plans.  Our “Benchmark Series” strategies incorporate the following six types of "index funds" and we describe them here with their commonly-used generic names:

• Large Cap stock fund
• Mid Cap stock fund
• Small Cap stock fund
• International Large Cap stock fund
• Corporate Bond Fund-Intermediate Term
• Money Market Fund

Most 401k plans include at least these six types of funds ... by one name or another.  So you should be able to match up the fund options in your 401k with our recommendations.  But note: You may need to read through your employer's fund descriptions to determine what type they really are.

• Be aware that your plan may have special names for its funds that don't necessarily identify what type of stock market index each one tracks.   In some cases, you may need to do a little research about your plan’s investment alternatives to determine how its funds match up with our recommendations.
• Note that you do not need to pay attention to the "Rydex", "ProFunds" or "ETF" fund symbols that are presented in the newsletter and Trade Alerts. These fund symbols are only relevant when following the Model Portfolio in some other kind of account than an employer-sponsored 401k or 403b plan.

Growth vs. Value Funds: In addition, your 401k might offer more specific options such as a choice between Large Cap “Growth” and Large Cap “Value” funds.  If that is the case, then we suggest you use the “Value” option in each case except during very strong bull markets.

Other More Specific Investment Fund Alternatives: Your 401k might have other options such as a "technology" fund alternative or an “emerging markets” fund.  Or perhaps your plan allows you access to a very broad range of mutual funds, index funds and sector funds.  If that is the case, then there are two possible approaches you could consider.  First, you could simply ignore the additional fund options in your plan and stick with the basic fund options covered by the Growth Portfolio or Conservative Portfolio.   On the other hand, you could see how your plan’s fund options line up with the investment options featured in the Performance Xtender model portfolio strategy.  Since the Performance Xtender has delivered a stronger risk-adjusted return than the Growth Portfolio, you may want to consider using it for your 401k if you can.

Check Policies on Fund Switching: The other aspect of your 401k plan to review is its current policies toward switching investments.  To follow our plans, you will need free access to your investments and the ability to make changes whenever you want.  In addition, you should make sure that your plan does not include any transaction fees or “early redemption fees”.  Most 401k plans currently do not.  However, if yours does … then you will need to analyze the potential impact of any fees upon making about one investment change per month.

Make the Initial Investment

You can make the initial investment once you have decided which approach you’re going to take and made sure your 401k plan has the right kinds of fund alternatives for the Model Portfolio you intend to follow.  You can begin by investing your designated funds according to the Model Portfolio’s “Current Recommended Portfolio Allocations.” 

Follow the instructions in the Quick Start guide for your Model Portfolio.

Ignore the Ticker Symbols We Recommend: Most likely, you won't need to concern yourself with "ticker symbols" when making investment choices within your 401k plan. The ticker symbols that we provide with every investment recommendation are helpful mainly when investing through a broker.

Your 401k plan should have a defined list of funds in which you can invest; and you will have to stick within that list. Every 401k plan has its own naming convention for its fund alternatives and you will need to become familiar with their names and determine how they match up with the generic fund names we recommend.

Follow the Trade Alerts for Recommended Changes

Following the recommended portfolio changes announced in periodic Trade Alerts shouldn't be any different whether you are investing within a 401k plan or some kind of taxable brokerage account. You simply should make the changes on a timely basis ... preferably the next day or within several days of receiving a new Trade Alert.

The only difference might be some kind of limitations imposed by your employer or 401k provider on the frequency of changes you can make within your 401k plan. Within the past 10 years, the vast majority of 401k plans within the U.S. have moved away from imposing any restrictions. But you need to research this issue with your employer's plan to make sure you understand whether you will be able to follow the Model Portfolio's changes faithfully or not.

Monitor Your Performance Monthly

Investing within a 401k or 403b plan allows your investments to grow tax-deferred. That means your profits don't become taxable until they are actually removed from the 401k account or other "rollover" type account such as an IRA. Ideally, you should be able to allow your investment earnings to accumulate until retirement and only pay taxes on the portion of funds that you remove each year.

When reviewing the Monthly Performance Tracking Report you should note that the reported figures do not include any deduction for taxes. That means the figures should fairly accurately reflect the actual tax-free growth you are experiencing within your 401k plan.