The Guideline 401(k) Investment Principles
The global economy is having a big impact on small businesses across the country. To help small business owners and their employees stay informed during this challenging time, we’ve gathered information on 401(k) savings, investing, and more. For the latest news and insights, visit our resource hub.
Guideline’s investment strategy is driven by our mission to help small business employees save more for retirement. With this goal, we have four guiding investment principles:
- Make retirement saving more accessible
- Minimize fees
- Diversify broadly
- Play the long game
Making retirement saving more accessible
At Guideline, we advocate for offering your employees a meaningful way to save for their futures. Unfortunately, many employees, especially at small businesses, do not have access to a retirement plan at all. A 401(k) gives them a tax advantaged opportunity to save — the first and most important part of being prepared for retirement.
Providing a 401(k) with automatic enrollment increases participation. Employer matching and profit sharing plans can help employees save even more by adding to the amount they are already putting away for retirement. It is also essential to help your employees retain and grow their savings by ensuring egregious fees won’t chip away at their nest eggs.
Guideline cuts participating employees’ costs by eliminating layers of fees and using low-cost index mutual funds. Over the years, several economists and investment luminaries, including Jack Bogle, Burt Malkiel, Charley Ellis, and David Swensen, have assembled a compelling case for investing in low-cost, passively managed index funds.
Keeping this in mind, we have designed our managed portfolios using Vanguard index funds. Vanguard has a unique structure —it is owned by its fund investors. This has enabled Vanguard to be the market leader in driving down fund costs over the last four decades. Vanguard funds are always among the lowest cost at any given time.
Other 401(k)s typically offer target date funds, which cost participating employees at least 0.13% on their assets. You could do worse, but the funds in our managed portfolios may decrease your average expenses to 0.06%. We also curate a short list of approved funds that are aligned with our 3(38) fiduciary responsibilities.
Taking this approach allows us to minimize costs for participating employees, leaving more money working toward their retirement savings. In addition, we help participating employees invest wisely by diversifying their portfolios.
Diversification is generally considered “the only free lunch in investing.” We adhere to Modern Portfolio Theory (MPT), a widely accepted framework for managing investment portfolios, developed by Nobel prize-winning economists Harry Markowitz and William Sharpe.
According to MPT, broad diversification allows you to reduce your risk for an estimated rate of return, or increase your expected return for a given level of risk. Our first step is to identify diversified asset classes for our portfolios and then select index funds that represent the full asset classes.
Our managed portfolios look similar to comparable target date funds at lower costs and with a small allocation to real estate investment trusts (REITs). REITs are a good diversifier and inflation hedge for retirement accounts. Shown below are the seven asset classes that we use.
In addition to the seven asset classes above, there are other diversifying investments out there like hedge funds, natural resources, and private equity. Unfortunately, they are not appropriate for 401(k) investors because they are expensive, difficult to access, illiquid, and can be poorly constructed. Beyond diversifying across asset classes, we also look to diversify over time.
Playing the long game
With the asset classes and index funds in place, it is essential to understand each participating employee’s time horizon and risk tolerance. With Americans living longer and spending more money in retirement, they must build larger retirement accounts and invest with longer horizons.
The nature of risk and return requires striking a balance. If an investor does not take on enough investment risk, their portfolio may not outpace inflation sufficiently to meet their retirement goals. If an investor takes on too much risk, they can panic during volatile markets and turn a temporary market loss into a permanent loss of capital.
At Guideline, we do not want participating employees to fall into the trap of chasing returns — research has shown that those who do consistently underperform the market by large margins. We encourage participating employees to take on a suitable amount of risk and stay the course over time, even when the market is painfully volatile.
With this in mind, we use time to our advantage. We automatically rebalance participating employees’ portfolios to keep them on track with their asset allocation. Since a 401(k) is a tax-deferred retirement account, there are no tax implications for rebalancing.
Rebalancing is distinct from any fundamental changes in risk tolerance that can come over time, so we recommend that participating employees review their deferral rates and asset allocations yearly.
We believe in giving our small business clients the opportunity to provide a 401(k) that positions their employees for excellent long-term financial outcomes. Our investment principles reflect our ideals. By expanding access, paring down fees, and providing high quality investment management, Guideline offers employee-focused 401(k) plans with managed portfolios well suited for participating employees’ needs.
If you are interested in reading more of the research that drives our investment principles, notable sources include Jack Bogle’s Common Sense on Mutual Funds, Burton Malkiel’s A Random Walk Down Wall Street, Charley Ellis’s Winning the Loser’s Game, and David Swensen’s Unconventional Success.