While conventional wisdom may say that the more investment options one has, the better he can construct a portfolio, new studies say that may not be the case when it comes to employee retirement plans. Researchers found that a reduction in fund options actually led investors to choose lower cost funds better suited to their risk tolerance. Plan administrators have always been faced with a tough decision, whether to let investors have access to the widest range of investments possible, or to simplify the decision making process by offering a smaller menu of solid, low-cost options representing various asset classes. We have always leaned toward the latter, believing what the research is proving out: too many options creates confusion and a feeling of being overwhelmed. By sticking with one or two options in the major asset classes, as well as offering risk-based funds, participants are better able to research what is available and make the best choice for them, while still constructing a diverse portfolio.
Source: Wall Street Journal
To begin the year, the Dow Jones Industrial Average experienced a triple digit change in price, either positively or negatively, every single trading day during the month of January*. Volatility such as we experienced during the first month of the year may invite many investors to opt out of this roller coaster ride for one that appears to be much smoother – lifetime income annuities. These annuities, upon purchase, guarantee a steady stream of income for the rest of one’s life. On the surface, this option appears relatively attractive for those nearing retirement; however, there are many unforeseen risks that one must watch out for. First off, the annuity is guaranteed by a company, which introduces counter-party risk. Therefore, if the company goes bankrupt, the annuity and savings are more than likely going with it. Additionally, when one passes away, the remaining value of the annuity does not get passed on to one’s heirs but instead goes to the insurer. Finally, once purchased, one is unable to tap into the annuity should sudden health care or financial emergencies arise. Therefore, while the roller coaster ride we experienced in January may entice you to opt for one of these lifetime income annuities, keep these risks in mind before going off the tracks.