Diversification beyond the 401(k)

According to this column from Yahoo Finance, many companies are reducing the diversity of investment options in 401(k) plans while adding more "target date" retirement funds. It's always been worse for federal employees who have extremely limited options within the Thrift Savings Plan (federal version of the 401(k)). Plans with reduced offerings leave employees three investment options: stocks, bonds and cash. The thrust of the article on Yahoo is that having fewer investment options may leave retirement plans exposed to greater market volatility than traditional pension plans which can be invested in other assets: commodities, foreign currencies, high yield bonds and real estate investment trusts. If you have an inflexible retirement plan, I agree with the article that it is a good idea to supplement your 401(k) with some of these other types of investmetns. This can best be done using ETFs within an IRA. For a good primer on ETFs visit XTF Global Asset Management's web page.

What about target date funds? According to an article I read in Monday's Wall Street Journal, the jury is still out since most haven't been around long enough to see how they behave during bear markets. However, the I think the fundamental principles are the same as in my last post on investing: underlying asset allocation is critical and the fund with the highest allocation in stocks, including emerging markets, has had the best performance over the last three years (T. Rowe Price Retirement 2020, TRRBX). (Of course it may perform more poorly in a bear market, but I would predict it would have the best long term results.)