Playing with the Cards You’re Dealt

Playing with the Cards You’re Dealt

95% of 401(k) plans suck.  With such limited investment options, it’s often a challenge to put together a decent portfolio.

The typical plan that comes across my desk will include:

  • 3-4 low cost index funds
  • 10-15 actively managed equity funds (75% of those are usually U.S. equity focused)
  • 3-4 actively managed fixed income funds
  • 7-10 target date funds

Brutal right?  No sense complaining about it though.  You can only play with the cards you’re dealt.  Just because the plan isn’t ideal doesn’t mean it’s not worth optimizing.  There are good ways to approach these investments and focusing on a few small improvements can be very rewarding.

When dealing with any portfolio, it’s always best to first acknowledge you have no control over the direction of the market.

I’ll say it again.  You have no control over the direction of the market.

Once you come to terms with that fact, you can shift your focus to things you can control;  taxes, risk and cost.


401(k)s are qualified accounts so taxes are not too much of a concern when developing the investment strategy.


Make sure you have a well-diversified asset mix.  Don’t assume the target date funds in your plan are always the best option (I think most of these funds suck too!).  Most target date funds are expensive, equity-heavy and almost always overweight U.S. stocks.  Most people can build a more appropriate asset mix with the other options available in their plan.


The cost of your investments is easily overlooked but small differences in costs can make big differences in returns.  Take advantage of the low-cost investment options you have available.

Consider the following example:

Current Portfolio: 100% invested in a popular target date fund that has an expense ratio of 0.75%

Proposed Portfolio: Diversified asset mix constructed using index funds or lower cost investments available in plan.  Total expense ratio of portfolio is 0.25%.

Assume both portfolios have the same expected returns and the only difference is their expense ratio.


If you start with $100,000 and contribute $10,000 annually with a reasonable rate of return of 7%, the portfolio with a 25bps expense ratio ends up with nearly $175,000 more dollars after 30 years.

Amazing right?  Just a 50bps improvement in your costs can make a HUGE difference in investment returns over time.  I bet most people wouldn’t have much trouble finding a good way to use $175k in retirement.

So pay attention to the little things.  I promise you won’t regret it.

Tim Brennan

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