Portfolio Optimization and the 401-K Decision


  • Jan Serrano Francis Marion University


finance, retirement plans, defined contribution, defined benefit


As Defined Contribution plans at U.S. companies have overtaken traditional defined benefit pension arrangements, the burden of retirement planning and portfolio selection has fallen squarely on the shoulders of U.S. workers. Unfortunately, many employees do not learn enough about their retirement portfolios to make good investment decisions. Instead, they do what is easiest. which is often nothing at all. Or they simply split their retirement contribution evenly across each of the investment options available in their plan. As financial planners and investment professionals are increasingly called upon to help people make these kinds of decisions, it is imperative that they be able to identify the positive and negative attributes of each alternative, but also to assess how those choices fit within the individual's investment constraints and the economic environment at hand. While recent technological advances have opened the door to worlds of new portfolio selection techniques, planners must still critically evaluate input and output from these models to assure meaningful and appropriate portfolio design.

June Branch, an employee for a regional manufacturing firm, was unsure about what options to select in her 401-K when she joined the company in 2006. She selected one of the new life cycle fund options with a target date nearest to her planned retirement. Investment representatives are coming in two weeks to talk to employees and she wonders if some other combination of investment choices would be more appropriate