The Elephant in the Room

By The Trust Company on March 11, 2016

When it comes to retirement plans, abandon the “set-it-and-forget-it” mindset

You’ve worked hard, scrimped and saved, paid off credit balances, sent kids to college, and diligently put money into your retirement plan over the years. You think you’ve done a good job of planning for retirement on your own, and have finally decided to meet with a financial advisor to make sure a professional agrees that you’re on the right track.

 

But when your advisor is less than enthusiastic, you think, “What gives?”

 

“This is a scenario that we often encounter with new clients and prospects. I refer to it as ‘the elephant in the room,’” said Lucy Williams, CFP®, Vice President and Trust Officer at The Trust Company.

 

The “elephant in the room” refers to employer-sponsored retirement plans — TIAA-CREF, KPERS, 401(k), and so forth. These accounts represent a big chunk of many people’s investment portfolios, but are often untouched after the initial setup.

 

 

“Many people mistakenly think that their work is done after the decisions are made about how much to invest and how to invest it.” Lucy Williams, CFP®, Vice President and Trust Officer

 

Lucy Williams
“When we’re gathering information, we sometimes find that these accounts have been put on auto-pilot,” said Williams. “In these cases, one of the largest parts of a client’s net worth has been somewhat neglected. Many people mistakenly think that their work is done after the decisions are made about how much to invest and how to invest it.”

 

Important Decisions

When signing up for employer-sponsored retirement plans, we’re given some choices: How much do we personally want to contribute to the plan? Is there an employer-matching contribution to take into consideration? How do we want to invest the funds — including both the employer and employee contributions?

 

To simplify this decision-making process, typical employer-sponsored plans begin with a “balanced objective” asset allocation, meaning some funds are invested in stocks and some are invested in bonds. Many plans provide a range of asset allocations that take into account the employee’s number of years until retirement.

 

Once those decisions are made, it’s very easy to kick back, relax and wait for retirement. However, as time goes on, the coordination of your entire investment portfolio, including your employer-sponsored retirement plan, comes into play.

 

Next Steps

Todd Chyba
“As a participant nears retirement, a more frequent, thorough review of the retirement plan becomes more important,” said Todd Chyba, Compliance Officer and Retirement Plan Specialist at The Trust Company.

 

Known as an “active approach,” this process helps to ensure that you stay on track to meet or exceed your retirement savings goals.

 

You should do a quick review of your retirement plan each year and a more thorough review every five years. You should also review your retirement plan after major life events, such as a change in marital status or additions to your family.

 

“I like to tell plan participants that they should look at their year-end statements and ask some key questions,” Chyba said. “For example, ‘Has my risk tolerance changed? Are my contribution levels still appropriate? Has my tax situation changed? Has my income level changed? Have my beneficiaries changed?’”

 

If your investment objective hasn’t changed, your allocation probably shouldn’t change either. But your portfolio balances can become skewed depending on market conditions. Your financial advisor can help you “rebalance” your portfolio — in other words, restore it back to your original intent.

 

Since employer-sponsored retirement plans represent such a large portion of our net worth, they need to be actively managed and integrated into the rest of an investment portfolio.

 

“Ultimately,” said Williams, “the goal is for the elephant to leave the room, and be replaced with peace of mind that your retirement portfolio is staying on track.”

 

Quick Tip: Accelerate your retirement portfolio’s growth by increasing personal contributions each year until the maximum contribution level is reached.