With retirement investing, less is more

This spring marks four years since we changed our investment platform. At the time, we streamlined our managed portfolios and fund menu, reduced the costs of the funds we use, and outlined the core tenets to our investment philosophy, which include:

RIA (Registered Investment Adviser)

Unlike many 401(k) providers, in addition to being an ERISA fiduciary, Guideline is an RIA (registered investment adviser) with the SEC. That means we have an additional overarching fiduciary duty to act in the best interest of our clients. And over the last few years there has been greater scrutiny placed on IRAs (individual retirement accounts) to ensure investor protections because they are often rolled over from 401(k) plans.

So in short, Guideline’s fiduciary status to our clients obligates us to help our participants invest as responsibly as possible for their futures. It is our north star and the foundation of our investment philosophy.

This is in stark contrast to broker-dealers, like Robinhood, that are subject to a lower suitability standard. They are not fiduciaries and consequently can monetize in other ways, including payment for order flow along with securities and margin lending. Comparing day trading on a mobile app to retirement investing is an apples to oranges comparison (at best).

The vast majority of Guideline participants use one of our six managed portfolios—less than 15% choose a DIY path with a custom portfolio from our fund menu. For the DIYers out there, we hear you asking for more investment options including individual stocks, precious metals, derivatives, cryptocurrencies, and additional ESG (environment, social & governance) funds. With services like Robinhood, Webull, and Public growing quickly with record stock market highs, we understand that investment flexibility seems the order of the day.

Retirement investing and long-term goals

But retirement investing is different from daytrading on a mobile app because instead of speculating, you are investing towards an important long-term goal. And by setting aside a percentage of your income along with potential employer matching, you can help your retirement assets grow more quickly which may set you up for bigger capital losses when the capital markets get bumpy.

For example, Tesla stock has been a great individual investment for several years but it has also been a much higher risk versus a diversified portfolio. This is in part due to Tesla’s media coverage, being a favorite stock for hedge funds to short, and Elon Musk’s tweeting. Personally, I love Tesla cars, but the responsible way to invest in any individual stock in your retirement account is through a broadly diversified index fund where you avoid taking unnecessary, diversifiable risk. Tesla is included in the US stock funds we use in proportion to its market cap weight, so generally most of our participants have some limited exposure to Tesla stock.

Additionally, given how risky investing can be, and because saving for retirement is of utmost importance, the regulators generally apply greater scrutiny to retirement accounts than brokerage accounts.

401(k) plans sit under ERISA in the Department of Labor which includes investment fiduciary responsibilities (ERISA 3(38)) and a duty to act in the best interest of 401(k) plan participants.

Reflecting on what else has changed over the last few years, our retirement platform at Guideline has grown to almost $4B in assets across 18,000 401(k) plans, with over 80% of them being newly created 401(k) plans. This has come alongside the largest US fund managers, BlackRock and Vanguard, continuing to grow rapidly to almost $9T and over $7T in assets, with the fastest growth coming from their index fund businesses.

Additionally, ESG funds have continued to grow considerably in the number of funds available and assets, as there is broader interest in investing in ESG to help drive societal change and some evidence that ESG funds may outperform. While ESG funds still cost a premium over traditional index funds, the fees are starting to come down.

At Guideline, we are watching these developments carefully and hope to introduce some enhancements to our investment platform later this year. So stay tuned.