Use a 402(a) Pension Fiduciary to Pick Up Affluent Business Clients Webinar September 15th at 1:00 PM EDT
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How Awful are 401(k) Plan Investment Options for Federal Employees?
I had no idea the 401(k) plan investments for Federal employees were so bad. If you are in the Federal employee marketplace or want to be, you should find this information useful.
Why did this all of a sudden come to my attention?
We recently had an advisor order our industry-best investment risk program (OnPointe Risk Analyzer) and he is in the Federal Gov’t employee marketplace.
He asked me to load some of the Thrift Savings Plan (the federal employee version of a 401(k) Plan) into OnPointe so he could go after roll-over money from retiring employees. After I helped load that information, I was shocked and motivated to write this newsletter.
Here are the main “funds” (which are essentially index funds)
F-Fund—An index of small-to-medium U.S. company stocks not included in the S&P 500
S-Fund—Supposed to match the Dow Jones U.S. Complete Total Stock Market Index
I-Fund—Supposed to match the MSCI EAFE (Europe, Australasia, Far East) Index
C-Fund—Supposed to match Standard and Poor’s 500 (S&P 500) Index
Let’s compare the funds to benchmarks, my favorite 3rd party manager’s strategies, and FIAs.
The comparison goes back 7 years (limited by the S-Fund whose data only goes back that far).
Risk is a common theme—S-, C-, and I-Funds are all passive index funds that come with a significant amount of risk.
The safe-haven investment option is the F-Fund, which tried to mirror AGG, and has a decent drawdown (-11.88%) with returns that are pathetic (1.06%).
My favorite 3rd party manager’s strategies provide much better “risk-adjusted returns.”
The FIA was also a much better alternative than the F-Fund.
Target Date Funds
Federal employees also have access to target date funds. They are, well, classic target date funds (which means they are not very good). The following has the Government’s L-2030 and L-2040 and I split the difference and compared it to the Vanguard 2035 fund. I also compared it to using my favorite 3rd party manager’s Focused Growth SMA with only 20% FIAs.
Our Government Employees Deserve Better IRA Roll-Overs
Advisors can help government employees obtain better investment alternatives by having them roll their money into an IRA. This can be done when an employee stops working for the government (finds a new job) or retires.
There are literally hundreds of thousands of government employees who leave their government jobs every year to work in the private sector or retire each year. Many of these will need help deciding what to do with their money.
Leaving money in the Thrift Savings Plan—employees who don’t know any better may choose to leave their money in the government’s plan.
When an advisor is armed with good information to give to federal employees and BETTER investment alternatives, I don’t think it will be difficult to convince them to roll their money into an IRA to generate better risk-adjusted returns before and in retirement.
Roccy DeFrancesco, JD, CAPP, CMP
Founder: The Wealth Preservation Institute
Founder: OnPointe Software
Co-Founder: The Asset Protection Society