Equity Allocations in 401(k)s


by Igor Tiguy, CFP®, AIF®, MSPFP, Director, Planning Services

While stock allocations are often high in 401(k) plans due to the typically long-term time horizon of 401(k) investors, we have recently observed higher-than-usual stock allocations in general, and very high U.S. stock allocations in particular. The high U.S. stock allocations are mostly due to the extended bull market. As U.S. stocks outperformed most other asset classes over the past several years, the 401(k) investors who did not regularly rebalance have become significantly overweight in U.S. stocks.

As discussed in a recent blog, we find neither U.S. stocks nor U.S. bonds particularly attractive. At these high U.S. stock valuation levels, we are generally advising clients to: decrease the overall exposure to stocks, overweight international developed and emerging markets stocks vs. U.S. stocks, allocate a significant portion of the portfolio to alternative investments, and raise cash. However, each individual’s situation is unique and investors should speak with someone familiar with their specific allocation and requirements.

We have three separately registered companies, including Twelve Points Wealth Management (providing financial planning and investment advisory services to families) and Twelve Points Retirement Advisors (providing fiduciary guidance to 401(k) plan sponsors).

When working with Twelve Points Wealth Management clients, we review their 401(k) plan options, and help them build the more traditional stock and bond 401(k) portfolios, while allocating a significant amount to alternatives and opportunistic investments in the IRAs and taxable accounts we’re managing for them.
When working with Twelve Points Retirement Advisors clients, we try to add as many alternative investments as possible to the list of funds the plan participants can choose from.   We do not build model portfolios for plan participants for every one of our 401(k) clients, but whenever we are allowed to build model portfolios, we are happy do so. As referenced above, our 401(k) models are overweight alternatives, overweight stable value or money market, underweight stocks as a whole but overweight international and emerging  vs. U.S., and underweight bonds as a whole but overweight opportunistic and hedged bonds vs. traditional intermediate term bonds.

If you have specific questions about your 401(k) plan investment allocation, please reach out and we’ll be happy to guide you through building an improved portfolio.  Likewise, we are also looking forward to helping 401(k) plan sponsors who would like to improve their current plan, in order to improve participant retirement outcomes.

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