[caption id="attachment_30611" align="alignleft" width="108" caption="Dieter Thurow"][/caption]

After the real estate debacle over the past three years, it’s quite possible that 401k/403b plans are now the largest remaining retirement asset for most people. It’s an unfortunate fact that this very important asset was also hit hard by the stock market crash of 2008.  Despite continuing uncertainties, a number of actions can be taken to structure the plan’s portfolio and optimize its performance.

As a first step, let’s examine the current environment. At over 12,000, the Dow Jones Industrial Average (which is an  unmanaged index and not available for direct investment) is solidly back up to where it was before the 2008 decline and, quite significantly, is within 15% of its all-time high of 14,167 achieved in October, 2007!

Against this backdrop of the stock markets’ recovery, the most important question is: Has my 401k/403b portfolio recovered its value in line with my expectations since 2008?  If not, a number of pro-active steps can be taken to help get this most important asset back on track.

Before looking at the specifics, let’s review the limitations that are common to most 401k/403b plans. We are all aware that most plans offer only a limited number of asset categories and mutual funds for investment. Therefore, whatever opportunities for improvements are available need to be considered within the confines of the plan’s limitations. Remember, the value of a mutual fund investment will fluctuate up or down with changes in market conditions.

The most important decision to make before improvements are possible is which of the many design principles can be most productive in managing regular 401k portfolios. We have found that applying Modern Portfolio Theory (MPT) principles can be quite effective. Essentially, MPT is an investment theory which attempts to maximize the portfolio’s expected return for a given amount of market risk. To accomplish this, we would carefully choose from the available asset categories and decide on how much money to allocate to each.

Given the plan’s limitations, and with this theoretical underpinning in mind, let’s take a look at the steps that can be taken to optimize the plan’s performance. However, we always need to keep in mind that investment decisions should be based on the individual’s goals, time horizon and risk tolerance, and that investments seeking to achieve higher rates of return generally involve a higher degree of market risk.

Select the desired asset categories in accordance with one’s assumptions of current and future economic and financial market trends.

Allocate an appropriate dollar amount or percentage to each category in order to optimize the expected return/market risk characteristics of the portfolio.

Select the most appropriate mutual funds from the available list within each of the chosen categories.

Monitor the performance of the portfolio and make adjustments when future economic conditions change.

In addition to optimizing the 401k portfolio by itself, it should also be integrated with other assets for maximum future retirement benefit. For example, since the only investment vehicle in many of the regular 401k/403b plans is a mutual fund, it may be beneficial to diversify one’s overall portfolio by using other vehicles outside the plan.

Although most individuals who are familiar with investment analysis and strategies can implement the suggested steps themselves, utilizing professionals in this process can often provide a distinct advantage. With today’s technology, the more experienced financial advisers use tools that will help in the asset category and mutual fund selection and optimization process that would achieve the most appropriate risk/return profile for the individual. Use of the right tools could also make it more efficient to monitor the account’s performance and make adjustments as appropriate under changing circumstances.

In conclusion, this would be a really good time to implement whatever opportunities for improvement are available. Although it may seem to be a daunting task to deal with the complexities of today’s economic environment, individuals who are diligent in managing their retirement plans, with or without professional help, can optimize the future financial outcomes and gain more control in the process.


Dieter Thurow-CPA/PFS is President of Thurow Wealth Management Inc., specializing in retirement planning and portfolio management. He’s located in Healdsburg and can be reached at 707-431-8898 or dieter.thurow@natplan.com. Securities are offered through National Planning Corp., member FINRA/SIPC.