Simplify your retirement assets for your benefit

By Sharon L. Thornton

The Daily Record Newswire

401(k) plans have become the primary source of retirement income for most Americans. The quality of a plan affects the retirement life style of the participant. Many times a company chooses a plan for the wrong reasons. It can be something as simple as the ease of administration or the desire on the participants to have all the "bells and whistles" of a mutual fund complex.

Options such as daily viewing, online access to allow changes in investments, unlimited number of changes per year, and a platform of too many investment choices make managing your 401(k) account time consuming and confusing. Some retirement plans may have 20 to 50 different investment options and some of the options may duplicate each other.

Studies indicate that plans with too many choices spur participants to invest more in less riskier investments, which can negatively affect their asset allocation and retirement savings. Multiple options can also allow participants to chase past performance instead of having proper diversification.

Barry Schwartz, the author of the Paradox of Choice, discusses how our culture is embedded in the notion that having more freedom -- by way of more choices -- is the best way to maximize welfare, but more choices create confusion and with this confusion employees may end up delaying decisions or avoiding them all together.

A research study by Sheena Iyengar, Wei Jiang and Gur Huberman, in partnership with Vanguard, found that for every 10 investment choices offered employees, plan participation went down about two percent.

Beyond the choice paralysis caused by too many choices, the abundance of choice is also likely to produce poorer decisions as people attempt to simplify the choice to a point that this simplification impedes their ability to make a good choice. This can be seen in plans where a participant chooses to invest something in every option or worse may only chose one option.

Our founder George Karpus wisely started our 401(k) plan with two options, a fixed income option and a stock option. Each participant then allocates their retirement account in a prudent manner. This takes into consideration that a 30-year-old employee will have a higher allocation to equities as they have a longer retirement horizon. As they grow older they have the ability to shift more money to the bond option. Within each option the sector allocation is done for the employee.

For example, our bond option contains both domestic and international bonds. The stock option contains domestic equities (large, mid-cap and small cap) along with international equities and alternative investments. Changes can only be made on a quarterly basis.

How much easier can life get! Our employees can now spend their time working or in leisure without the anxiety of making decisions that will affect the ability to reach retirement. Productivity also increases as employees are not spending working time planning changes they may want to make in the plan.

Yes, it is true that sometimes less is more.


Sharon L. Thornton is senior director of investments for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully's Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.

Published: Thu, May 24, 2012