The income that you live off of during retirement will come from three sources; your Lilly pension, Social Security, and the money that you saved in things like your Lilly 401(k), IRAs and other investments. For most people, the 401(k) will be their largest asset to meet their retirement income needs, so it’s important to take good care of it.
401(k) Investment Options
The Lilly Employee 401(k) Plan offers:
- seven core investment options
- nine Target Date Portfolios
- the Eli Lilly Common Stock option
- self-directed brokerage account (also called self-directed mutual fund window)
Target Date Portfolios
In the Target Date Portfolios, each contains a mix of:
- money markets
invested with an eye toward the year you expect to retire and start withdrawing money. As time goes by, the investment mix shifts to more conservative investments (bonds and money market) automatically.
Target Date Portfolios are kind of a one-size fits most approach to investing. They offer very general diversification based on the date chosen. These options are typically used when the employee doesn’t have the time or knowledge to properly choose other investments. They become the fallback option. You would probably prefer an investment mix that perfectly matches you. That includes a plan that accounts for:
- your age
- risk tolerance
- and goals
Core Investment Funds
As for the other seven investment options (not including Lilly stock), they offer a limited ability to truly diversify your investments. Although you can achieve a fair amount of diversification with the core options, they do not provide the most flexibility and customization. For example, the International Equity options include investments in emerging markets as well as developed markets. What if you want your international investments to be in developed markets but not emerging? You don’t have a choice. It’s all or none. The same can be said for the Fixed Income option. It invests in high yield bonds and emerging market bonds. And the Real Assets option invests in precious metals, commodities, and real estate. While exposure to these areas may not be bad, if you would prefer to not be invested in emerging market bonds or maybe you want to be invested in real estate but not precious metals or commodities, you don’t have a choice. If you want real estate exposure in your 401(k) you also have to be invested in precious metals and commodities because the fund owns all of them. You have no way to segment them out.
Self-Directed Brokerage Account
Utilizing the self-directed brokerage account will allow more flexibility and customization. This is a brokerage account within the 401(k) in which you can choose from thousands of investments, many of them with no commissions or transaction fees. With this increased choice of investments, you are able to tailor your 401(k) to your needs.
You may be saying, “I don’t know what options to use out of the eight core options. How in the world am I going to be able to choose from thousands of options?” I agree. With any options you choose, you should either be very comfortable choosing investments on your own or seek the advice of a professional who can help you determine your risk tolerance and goals. According to a recent survey by The Charles Schwab Corp., 45% of respondents don’t feel they know what their best 401(k) investment options are. When asked how confident they would be in making the right investment decisions if they had the help of a financial professional, 76% said they would be either extremely or very confident. Without advice, only 50% expressed confidence.
You work hard for the money you’re saving in your 401(k). Make sure it’s working as hard as it can by fine-tuning your 401(k).
We’re here if you have questions.