I have seen many different qualified plans, and many of them share the same feature. The majority of the assets are placed in money market funds yielding a marginal return. What that tells me is the advisor on your plan (physical or 1-800) has little understanding on what portfolio construction is, and the participants are left with a poor return for their retirement.

Portfolio construction starts with a conversation with the participant. Do they need their 401(k) for their primary retirement? Are they comfortable with volatility? What can they reasonably expect to withdraw from their plan at retirement? Simple questions like these helps the advisor to construct a portfolio and show the range of probabilities of what the participant can expect.

Diversification in portfolio is also misunderstood as well. Placing a large cap mutual fund with a midcap is basically the same. Even though the names are different, the correlation and beta are high for both – this means there is no diversification.

Another danger is the participant’s belief they can construct a portfolio on their own. There are several factors for this: One, is the mentality of “Do-It-Yourself” that we are exposed to on an everyday marketing basis. I guess we can blame the daily commercials from the Home Depot commercials, and from the discount wirehouses as well.  Two,  what you don’t know is more dangerous than what you do know. Ask yourself if you are able to do the simple task of constructing a portfolio and understand the basics of beta, r-squared, CAPM, and correlation. If you don’t you are gambling. Constructing a portfolio is not the sum of all parts – it is a different asset that needs to be tested.

Saving for your retirement is a serious business. Planning properly, saving as much as you can, and understanding your limits in understanding investments will help you in the long run. Hiring a advisor experienced in portfolio construction will create more well being for your employees over the long run. If your employees see that you are making an effort to help their retirement, it will help your business.