Asset Allocation 101: Tips for Employers and Employees
By James Buccella, CMFC® Member, President of ADP Strategic Plan Services
Strategically balancing different types of investments can help your retirement plan participants manage risk and tap into various growth opportunities to stay on track to meet their retirement goals.
Today's workers who contribute to a retirement savings plan can't ignore the importance of smart asset allocation.
For retirement plan participants, an asset allocation strategy should be part of their master plan — dividing contributions among different asset classes, such as stocks, bonds, cash and international investments to meet their own goals and risk tolerance or utilizing target date funds for one stop diversification shopping. Because when you put proverbial eggs in different baskets, it may help minimize overall risk and potentially boost employees' chances of meeting their investment goals.
Investing can be risky business
Each asset class carries its own level of risk, responding differently to changes in market conditions. The goal is typically to select investments that have varying risk characteristics, contributing money into a variety of fund types within each investment type. A diversification strategy may help increase the probability that at least some of the investments will provide favorable returns even when others don't.
But it all comes down to how much investors are willing to risk. When creating a retirement strategy, your plan participants should consider the following:
What's the fund's objective?
Each non-target date investment option in a retirement plan will generally try to achieve one or more of three main objectives: Stability, income generation or growth. The higher the potential return of the fund, the higher the potential volatility, which is our measure of risk. The fund's objective is found in the prospectus and may be abbreviated on the fund fact sheet.
What level of risk are participants comfortable with?
There's a trade-off between investment performance and risk. Higher returns are associated with higher price fluctuations. That's why it's important to weigh tolerance for risk against how long the investor has to achieve their investment goal.
With age in mind, how much risk are they willing to take?
When setting a specific goal, investors should also consider their time horizon. The time horizon is the amount of time they have to reach their savings goal before they need to start taking withdrawals. Generally speaking, the longer they have, the better equipped they are to weather short-term fluctuations in the market. And it is important to remember that investors should periodically review their allocations among the various investment classes as they get closer to retirement. Target date fund investors get that review and reallocation as part of the target date's "glide path", where the target date provider changes the mix of investments as the retirement target date gets closer.
Related reading: 3 Ways Organizations Can Encourage Employee Retirement Planning
How might market volatility, inflation and interest rates impact the investments?
Market volatility is influenced by things like world events, geopolitical risks, the economy, political change, natural disasters, inflation and more. When the market is highly volatile, investments could go up or down significantly in a short amount of time. That's why it's important to focus on the long term and not let short-term volatility influence investment decisions.
Inflation can impact one's ability to live comfortably during their retirement years — from paying for everyday expenses to covering unexpected medical expenses. It's among the biggest dangers for long-term investors. Though investments can still grow, their overall purchasing power will decrease if that growth isn't keeping pace with inflation. This risk is easy to overlook, but can be very important to the ultimate success of a participant's retirement planning.
Another factor to consider is interest rate risk. When interest rates go up, the value of some types of investments, like bonds, can decrease.
This material is being provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. All investments have some form of risk. But spreading money across different asset classes can help ride out stock market fluctuations and shifting economic conditions. Do your part to help ensure your employees take advantage of retirement benefits and encourage financial literally so they are prepared for whatever comes next.
Connect with an ADP retirement planning services specialist to learn how to strategically balance different types of investments or call (800) 432-401K .
This content was originally featured in the Retirement Success Pod(K)ast by ADP Retirement Services. Subscribe and share the link with your employees to help them maximize their retirement readiness.
ADP Strategic Plan Services (SPS) is a registered investment advisor with the Securities Exchange Commission. SPS offers to act as an investment manager assuming full discretion for selecting monitoring and replacing investment options and can also provide advice and guidance to plan fiduciaries, by assisting with plan monitoring and investments. SPS does not serve as an investment advisor to any fund company nor is it an issuer of mutual funds or any publicly traded securities. Investment options are available through either ADP Broker-Dealer, Inc. (ADP BD), Member FINRA One ADP Blvd, Roseland NJ 07068 or (in the case of certain investments) ADP, Inc. Associated persons of SPS and registered representatives of ADP BD are employees of ADP, Inc. ADP, Inc. and its affiliates do not offer investment, financial, tax or legal advice, and nothing in these communications is intended to be, nor should be construed as, advice or a recommendation for a particular situation or plan. Please consult with your advisor for such advice.
Unless agreed to in writing with a client, ADP, Inc. and its affiliates do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisors to provide advice to plans or participants; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans.
M-595167-2024-08-20
