Model 401(k)Portfolios
Three hypothetical workers and two real companies.
From Kiplinger's Personal Finance magazine, March 2004
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So, what kind of investing advice might employees get when their 401(k) plans offer to lend them a hand? To find out, we asked Financial Engines (FE), a leading firm that signs on with companies to give such advice to plan participants, how it would rejigger the portfolios of three hypothetical employees in two very real 401(k) plans: the Vanguard Group, a mutual fund company with 11,000 employees, and Kiplinger Washington Editors, the 170-employee company that publishes this magazine.
Financial Engines created portfolios for hypothetical 25-, 45- and 60-year-old employees based on the funds offered by the plans, and then recommended allocation changes designed to help the employees reach their retirement-income goals. Whenever possible, FE suggested increasing contributions to the plan.
For each portfolio, FE estimated the chances that the portfolio would produce a big enough nest egg to meet the worker's goals, based on the performance of the funds chosen. The retirement income goals are based on 70% of estimated salary at the time the employee retires, assuming current income increases 5% a year to reflect pay raises and inflation between now and then. The odds of achieving that goal in the table may seem dishearteningly low, particularly in the case of the Kiplinger plan, which offers no employer matching contributions. But FE did not take into account other types of retirement savings, such as a company pension, personal IRA or other investments earmarked for retirement. Kiplinger offers a traditional defined-benefit pension and a profit-sharing plan in addition to the 401(k). That would greatly enhance the odds of reaching retirement income goals.
In the real world, FE would take those resources into account. The real value of showing the odds here is to illustrate how they increase when the portfolios are rebalanced. The potential one-year loss is based on the historical volatility of the funds in each portfolio. We list only the funds that FE included in a portfolio, not all of the investment choices offered by the plans.
| THREE WORKERS AND THEIR GOALS | |||||||||
| Employee's age | 25 | 45 | 60 | ||||||
| Retirement age | 67 | 66 | 65 | ||||||
| Salary | $40,000 | $70,000 | $100,000 | ||||||
| 401(k) balance | 10,000 | 150,000 | 600,000 | ||||||
| Retirement income goal | 49,000 | 65,000 | 74,000 | ||||||
| COMPANY: KIPLINGER WASHINGTON EDITORS | |||||||||
| Current annual contribution | $2,000 | $7,000 | $13,000 | ||||||
| Recommended annual contribution | 2,800 | 12,000 | 16,000 | ||||||
| Employer match | 0 | 0 | 0 | ||||||
| Funds | Allocation: | ||||||||
| current | | | proposed | current | | | proposed | current | | | proposed | |
| Vanguard 500 Index | 0% | 37% | 0% | 36% | 0% | 35% | |||
| Dodge & Cox Stock | 0% | 35% | 33% | 35% | 0% | 18% | |||
| Baron Asset | 50% | 0% | 0% | 0% | 0% | 0% | |||
| Baron Growth | 0% | 0% | 0% | 8% | 0% | 0% | |||
| Oakmark International | 50% | 11% | 0% | 0% | 0% | 0% | |||
| Northeast Investors Trust | 0% | 0% | 34% | 0% | 0% | 0% | |||
| Loomis Sayles Bond | 0% | 17% | 33% | 21% | 33% | 22% | |||
| Vaunguard Short Term Corporate Bond | 0% | 0% | 0% | 0% | 33% | 25% | |||
| Schwab Retirement Money | 0% | 0% | 0% | 0% | 34% | 0% | |||
| CHANCE OF SUCCESS | 36% | 62% | 18% | 63% | 5% | 52% | |||
| POTENTIAL ONE-YEAR LOSS | 21% | 14% | 9% | 14% | 2% | 10% | |||
| COMPANY: THE VANGUARD GROUP | |||||||||
| Current annual contribution | $2,000 | $7,000 | $13,000 | ||||||
| Recommended annual contribution | 2,400 | 12,000 | 14,000 | ||||||
| Employer match | 1,600 | 2,800 | 4,000 | ||||||
| Funds | Allocation: | ||||||||
| current | | | proposed | current | | | proposed | current | | | proposed | |
| 500 Index | 0% | 25% | 0% | 20% | 0% | 26% | |||
| Total Stock | 0% | 25% | 0% | 0% | 0% | 0% | |||
| Total International | 0% | 9% | 0% | 0% | 0% | 0% | |||
| Balanced | 50% | 35% | 0% | 0% | 0% | 0% | |||
| GNMA | 0% | 6% | 0% | 27% | 0% | 30% | |||
| Money Market | 50% | 0% | 0% | 0% | 0% | 0% | |||
| Prime Cap | 0% | 0% | 34% | 24% | 0% | 0% | |||
| International Growth | 0% | 0% | 0% | 0% | 34% | 13% | |||
| Extended Market | 0% | 0% | 33% | 29% | 0% | 0% | |||
| Small Cap | 0% | 0% | 33% | 0% | 33% | 15% | |||
| U.S. Growth | 0% | 0% | 0% | 0% | 33% | 0% | |||
| Total Bond Market | 0% | 0% | 0% | 0% | 0% | 16% | |||
| CHANCE OF SUCCESS | 40% | 81% | 62% | 77% | 56% | 54% | |||
| POTENTIAL ONE-YEAR LOSS | 5% | 14% | 22% | 15% | 21% | 10% | |||
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