Author: Paul A. Carl, CHSA, CPFA™Vice President, Retirement Plan Consulting, Registered Representative
My parents’ families were small business owners, and my parents were incredibly fiscally conservative. My dad especially, a third-generation stone masonry and concrete construction business owner, would comment about how hard he worked to earn money. He worked long hours and we took no family vacations. He literally worked a 24/7/365 schedule. If he wasn’t on a job site or in the office, he was working on the books at home or making calls, even on holidays.
As a result of being fiscally conservative and his exposure to the Great Depression, he favored FDIC-insured certificates of deposit. Reflecting, I guess I intrinsically absorbed his conservative fiscal nature. I chose a balanced mutual fund, comprised of both stocks and bonds, as my first investment even though I was in my early twenties with time on my side. Outside of my own personal investment, I don’t recall balanced funds being used much in retirement plans at that time.
If I had to pinpoint when the balanced fund began to rise in popularity, I would guess it coincided with the DOL’s originally published ERISA 404(c) relief for participant directed investment choices. While that original relief called for diversification through a stock, a fixed income, and a cash equivalent investment option, I do recall that plan fiduciaries often adding a balanced fund as an extra option.
The balanced fund gave the plan participant the opportunity to invest in a pre-allocated investment mix. Whether or not this investment mix was the right mix for each individual participant, who knew? It was a solution, many argued, that mirrored the pooled investment accounts of traditional defined benefit pension plans, money purchase pension plans, and profit sharing-only plans. Each of these were invested in a one-size-fits-all investment style. Most reflected the comfort of the plans’ primary fiduciary, who was often the business owner.
It wasn’t too long before asset allocation funds based on risk gained in popularity. These risk-based asset allocation funds in some cases were nearly identical to the balanced fund, consisting of individual stocks and bonds allocated towards a specific risk/return analysis. Some of the risk-based asset allocation funds took on a new look through a fund-of-funds approach. Regardless, for plan fiduciaries, one of the main fallacies of the balanced fund was addressed: the risk tolerance concerns specific to individual participants. Yet, the balance fund persevered.
Today, retirement plan fiduciaries have a buffet of choices available for participants who seek help allocating their investments. These range from the risk-based and age-based asset allocation funds to managed models to the traditional balanced fund, and more.
Does your plan offer the traditional balanced fund?
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