Anatomy of My Friend's 401(K)Adrienne Carter
I was recently hanging out with friends one Sunday, chilling on the couch waiting for Grey’s Anatomy to come on. Really, no weekend is complete without a little Patrick Dempsey time. But I digress.
Anyways, one of my friends is a teacher at a private school on Manhattan’s Upper West Side, and we started looking over her retirement account. (Yes, we are that nerdy.) We do this on a semi-regular basis, checking out her returns, her investment options, and her asset allocation—basically, a typical portfolio check-up.
Generally speaking, her portfolio was in pretty good shape. She had the bulk of her assets in domestic equities, including some exposure to small caps, and she had around 20% in an international fund—a nice aggressive asset allocation, appropriate for my twenty-something friend. I did recommend simplifying her portfolio, cutting back her domestic holdings from three investments to just one since they basically owned the same things. And I also suggested that she eventually add some REITs and a bit of bonds for diversification. But she's young, she can wait.
But I nearly choked on my leftover huevos rancheros when I realized that her ONLY investment options were variable annuities. Now, I fully admit I have a visceral reaction when I hear about anyone investing in variable annuities, particularly in a tax-deferred account like this one. That’s because generally speaking there are cheaper alternatives to such insurance products. And after checking in with a couple of financial planners, my opinion hasn’t changed. So if the only investment options in your 401(k) or other tax-deferred vehicle are variable annuities, I recommend you head straight for your HR department, do not pass go, and demand some other investment choices.
Now TIAA-CREF, which manages my friend’s investment options, may be a notable exception. The expenses on her choices are pretty low, roughly 0.40% of assets. I couldn’t tell from her plan information whether or not there were other imbedded fees she’s paying. That chat will have to wait for another night on the couch.