Your Employer Doesn't Select Your Investments

A few years ago I accompanied a very accomplished UK physician to testify before a legislative committee in Frankfort. At the meeting, a state senator asked a convoluted – and mostly off-topic – question. After several minutes of awkward back and forth, the physician finally said, “I’m sorry, sir, but I don’t know the answer to your question. I’m just a lowly surgeon.” Lesson: Even very smart people don’t automatically know everything.

Intuitively, we realize we don’t know everything. So, sometimes I think our minds assume there is a system in place to protect us when we don’t have expertise in a specialty. Think about flying: We don’t know if the plane is mechanically safe or the weather is appropriate to take off. But, the airline and air traffic control do have the information and expertise to make those decisions for us. There is a system in place to keep us safe.

Maybe that’s why some people assume our employers select the right mix of investments within our 403(b)s and 401(k)s that are appropriate for our unique circumstances. If we don’t have the knowledge and expertise, there must be a system that takes care of us, right? Right? No, not really.

Contributions

If you are fortunate enough to work where your employer matches a portion of your contributions, that’s great. Don’t assume, however, that your 5% contribution matched with your employer’s 10% - in the case of UK faculty and staff – will result in savings sufficient for your retirement. It’s based on what your employer can afford and what they believe is necessary to recruit and retain talent. What you need to save for retirement depends entirely on what kind of lifestyle you desire in retirement. Only you can determine that, not your employer.

Asset Allocation

This is a fancy term for choosing the right investments within your 403(b) or 401(k) that balances risk and reward in a way that is right for your goals. For instance, mutual funds that invest in companies in the stock market are inherently riskier but, historically, have produced better returns than other types of investments. Bond mutual funds, on the other hand, are normally less volatile and move independently of the stock market. Real estate funds and international funds round out the broad asset classes. The correct mix that is right for you depends on your age, your goals, how much wealth you have accumulated thus far, and possibly your personal risk tolerance. You must make these choices within your employer’s retirement plan as they can’t do it for you.

Rebalancing

Rebalancing is the periodic process of moving your asset allocation back to where you intend. For instance, as stocks increase in value your portfolio usually becomes more heavily weighted toward those stock mutual funds. This means you are now taking on more risk than you originally intended. Rebalancing means selling a portion of your funds that have increased in value and buying funds in other asset classes on a periodic basis – at least once per year. This process will move your investments back to the mix that is right for your individual goals and circumstances. This is particularly important as you approach retirement and should be taking less risk. Your employer can’t do this, you have to do this for yourself.

Our clients are often quite accomplished in their chosen fields and are, appropriately, consumed with their careers and focused on their families. They don’t have the time or inclination to determine how much they should be saving for their future, how to structure their investments appropriate for their goals and how to keep them on track – and their employers can’t do that for them. That's where we come in. 

Steve Byars