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Investing Guide to State of Michigan 401(k) / 457 Plans


Strengths

  • Core, market-based options (Tier 1 – Passively Managed). There are several good core options available at institutional level cost.

  • Match on contributions. Any match provides a fantastic boost to investment returns.

  • Opportunity to diversify in self-managed account. This is an enormous benefit to add asset classes over the Tier 1 group that do not require use of active management (for more information on active and passive management, see the link to our eBook below). Note: For our model portfolios below we do not use the self-managed account as this level of complication and diversification requires a more personal review than we can provide in this guide.

  • Roth 401(k) option. Especially when beginning to save the Roth option provides an opportunity to minimize your future tax burden. A Roth is also beneficial for those who have pensions in retirement. Often, savers mistakenly save to pre-tax accounts and pay similar or higher rates in retirement, where the would have benefited from having more in Roth savings.

Weaknesses

  • Limited opportunities to diversify without using active, gambling managers. Unless you choose to research funds and utilize the self-managed account, the options for diversification beyond the few Tier 1 options requires use of high cost, active managers. While this is a common feature of most retirement plans, it is still detracts from attractiveness of the Michigan Plan.

  • SSgA Russell 2000 is a poor index choice. While the Russell 2000 is a common small-cap fund, it is not our preferred choice (for more information see our chapter on Small-Cap active management in Clear Investing, Intentional Investing). In addition to performance concerns, there is significant overlap within both the Russell 2000 and the S&P Mid Cap portfolios.

  • Several asset classes missing in Tier 1 passive options. See our list below of areas to consider diversifying in other accounts including the self-managed account.

  • Target Retirement Date Funds. The SSgA Target Retirement Date Funds are meant to be a managed portfolio based around an expected retirement date.

Strategically, the weighting of the SSgA underlying fund choices is less than desirable. A more diversified mix across stock asset classes with a tilt toward value stocks may improve results for the long-term investor.

Overall, the funds have little to offer over investing in the other Tier 1 choices available in the plan to most investors.

Strategies

One of the advantages of plans like the State of Michigan plans that have solid core holdings is that in a rounded out portfolio these often will be the largest need, and they are available at a lower cost than can be purchased independently.

One strategy is to use the core options within the 401(k) and diversify further outside of the plan or within the Self-Managed Account. By utilizing a companion IRA, Roth IRA, or taxable account, one can take advantage of very low-cost core investment options in the State of Michigan plans, and supplement them with independent savings.

If you are saving at a rate above the State of Michigan match, consider your other options for transferring that additional savings to other tax advantaged accounts outside of the Michigan plans. Depending on the particulars of your tax and investment situation you may be eligible for and benefit from:

  • A deduction for your own IRA contributions

  • A Roth IRA

  • A non-deductible IRA conversion strategy

It may also be in your benefit to invest in a taxable account. There are significant benefits to the current and future diversification of holding a combination of taxable, tax-deferred (pre-tax), and tax-free (Roth) accounts.

You may also take advantage of the benefits available within a spouse or partner’s plan to achieve greater diversification and create a holistic investment strategy over the best options available to you over all of your plans.

Asset Classes to Complement Your State of Michigan 457 / 401(k)

It is important to not minizing the fact that the investment options provided do not cover the world of available options. By not being able to participate in markets, you may reduce return potential and increase volatility. See our Forbes post on how a retirement plan with basic options can cost a saver millions of dollars over their lifetime.

Below is a list of asset classes to utilize in your own accounts that complement our model recommendations:

  • Domestic Marketwide Value

  • International Marketwide Value

  • International Small-Cap

  • Emerging Markets Core

  • Emerging Markets Marketwide Value

  • Emerging Markets Small-Cap

  • Diversified, short-term bonds

  • Foreign Bonds

  • Inflation-protected bonds

  • Real assets including real estate, commodities, and precious metals

Using an effective combination of the above investment categories in combination with your State of Michigan plan can improve your investment experience. The benefits of increased diversification can result in a less volatile portfolio.

For more information on the above strategies and other investment ideas linked here is a complementary PDF version (Password = clearandfree) of our book Clear Investing, Intentional Investing.

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