Your NRECA 401k Options Explained In Plain English
I worked at a co-op for almost 12 years. During those years I sat through numerous retirement planning seminars. While I always felt the intentions were good in those seminars, I can’t say I learned much from them.
I never got the answers that I wanted or needed. Now understand, I’m only saying that was my experience. Your experience may have been totally different.
Today I want to discuss, what I feel, is the single most important benefit the co-op offers you. And that is your NRECA 401k plan.
It’s important because it’s the fastest and simplest way for you to grow your wealth over time.
However, in my experience, it was never explained to me how it worked or what the difference was between the various investment options.
Nor were the fees of the plan ever discussed. I know you think it’s free, but it’s not. And I don’t think it should be free, it costs real money to manage these plans. I’m not faulting NRECA for charging for their plan, I’m just betting many of you think it’s free.
Long story short, I never really understood the plan for most of my time at the co-op.
Today I want to give you just a brief crash course in the various investment options available to you in the plan. I’m going to try to oversimplify what each option is on purpose because I think it’s way more important that you grasp the general goal of each fund rather than getting in the weeds as to what investments are in the fund, the expense ratio of the fund, the top ten holdings on the fund, etc. I almost fell asleep typing that.
If you want to know all that information, go to Homestead Funds and knock yourself out. All of that information is there for your bathroom reading pleasure.
Without further delay, let’s look at what’s available to you.
Again this is general information along with my opinions. This is not investment advice or recommendations on what you should do.
Stable Income Fund
This is essentially a Money Market fund. Money Market funds invest in low risk, short term debt securities, such as Treasury Bills, municipal debt, and corporate bonds.
In plain English, this is a fancy savings account. It’s meant to keep your money “stable.” That’s it. This fund is not designed to grow your money.
But I often see this fund as being the most detrimental fund available to you. Why is that? Because this tends to be the fund where the growth of your money goes to die. This is the fund that people move their money to at the wrong time for the wrong reasons.
For example, I knew someone that bragged to me that they moved all their 401k money to the Stable Income Fund when Trump was elected in 2016. I looked at their statement and that decision had cost him almost $250,000 in growth. He didn’t know that nor did I tell him that because it wouldn’t have helped anything.
Short Term Bond Fund
If you don't know what a bond is just google it. A bond is debt. You are buying someone’s debt and hoping they pay you back at a decent interest rate.
This fund is a fancier savings account. This fund invests in short term bonds maturing in 3 years or less. I don’t have much to say about this one. It’s boring and uninspiring and it is what it is which is a fancier savings account than the Stable Income Fund.
Diversified Bond Fund
This sounds fancy doesn’t it? Diversified! It must be good. This fund just buys bonds maturing at different dates that’s how they get to use the word diversified. Again boring and uninspiring.
*Full disclosure: I don't like bonds. I prefer stocks. With bonds you are a loaner. With stocks you are an owner. Be an owner not a loaner.
S&P 500 Stock Index Fund
This is an index fund tracking the S&P 500 which is the 500 largest companies in the United States. An index fund is what is called a passive fund, All funds are managed by someone either passively or actively. A passive fund is designed to copy an index and then the fund is basically on cruise control. There is very little buying and selling of stocks within the fund.
Conversely, an active fund is actively managed. Meaning the fund manager can buy and sell stocks as often as they see fit within the fund. One isn’t better than the other, they are just managed differently.
If you have more than one kid this analogy might make sense. I have one kid that I can passively manage and one kid I have to actively manage.If you’re a parent you will know exactly what I mean.
This is a great fund. I’m all about betting on American companies and American ingenuity. And what better way to do that than investing in the best companies in America.
Value Stock Fund
When you think about a Value Stock Fund, I want you to think slow and steady. Value stock funds to tend to grow slower but a steadier pace. These funds contain companies that trade at a lower price than the value of the companies. Simply put these aren't sexy companies. These are companies that the average investor might overlook because of that reason. Think Johnson & Johnson, Honeywell, Conoco Phillips, Proctor & Gamble, etc. These companies are focused on slow and steady growth and typically pay good dividends.
Value stock funds are an excellent choice for the long-term investor because you typically buy the shares for less than the companies are actually worth. Again the name says exactly what it is. They are companies you can buy at a good value.
Diversified Growth Stock Fund
There's that word again. Diversified so it must be good right? In this case it is good and there is usually good diversification in this fund. A diversified fund is an investment fund that is broadly invested across multiple market sectors, assets, and/or geographic regions. It holds a number of securities, often in multiple asset classes. Its broad diversification helps to prevent one off type events in one area from affecting an entire portfolio.
Basically it's a fund focused on long-term growth invested in companies across numerous types of businesses both small and large with its primary goal to be growth over time. It will usually include a mix of value companies like we mentioned above, small companies (explained below) and possibly some S&P 500 companies as well.
Small Company Stock Fund
Most funds tell you exactly what they are in their name, the key is to know what the name means. A small company stock fund is typically made up of small companies. Now small is a relative term. Small in this situation means companies with a total market value of $250 million to $2 billion. I bet when you think of a small company you think about the mom and pop business down the street and not companies worth $250 million to $2 billion. Me too. However, that's not the case here.
Think of a small company stock fund as a fund that is focusing on finding the next big thing. At one time, Apple, Facebook, Amazon, etc were all “small” companies based on their total value.
A small company stock fund is trying to find the next Apple, the next Facebook, the next Amazon, etc, etc.
Small company stock funds can be very volatile at times, but if you can stand volatility these type funds can really reward you long term. Over long periods of time, meaning 20 years plus, small company funds are as good or better than any fund out there.
International Stock Fund
This is stocks of companies in other countries. These funds do better when America’s economy is viewed negatively which historically speaking is 1 out of every 5 years. I’m not against International Stocks, however, we live in a global economy now and almost every American company has exposure to international markets. Meaning if you buy Apple stock, which is an American company, you are essentially exposed to the international market because Apple operates worldwide.
I’m not a huge fan of International Stocks. I think it’s fine to own a small percentage of them in your portfolio but that’s about it. I would ask you this. If I offered you these three choices: American Stocks, European Stocks, Asian Stocks where would you bet your money would do better long term? I pick American Stocks because I live here and I frequent those businesses on a daily basis. But that’s just my opinion.
Target Date Portfolios
I’m not going to discuss these in detail because I don’t like them at all. They are constructed for the lazy investor that doesn’t want to do any work or research anything. They give the illusion of diversification. Don’t get me wrong they are better than doing nothing at all, but you have much better choices available to you above.
Many Target Date Portfolios are designed to become less risky as you approach the target date of the fund which typically coincides with your retirement date. As the fund approaches the target date it puts a greater concentration on bonds and less on stocks. Which is cool, if that’s what you want. Just remember the average retirement lasts 20-30 years.
That means even at retirement you are still a long term investor simply based on life expectancy. And during that 20-30 years you will need your portfolio to grow faster than inflation over time.
Personally, I don’t like the thought of 30% of my portfolio being in bonds during a 30 year retirement. Stocks of great companies have outreturned bonds by a 3-1 margin since the inception of the market. Will that always be the case? I can’t answer that. But, like I said earlier, I bet on American companies and American ingenuity every time. I always will.
Conclusion
There you have it. Your NRECA 401k funds explained in English. These are my opinions and my opinions only about your choices and this is not investment advice and should not be viewed as such.
I would recommend you talk to a financial advisor before you make asset allocations within your 401(k) plan. Yes it might cost you a few hundred bucks to do so initially, but that few hundred bucks could change your life when you retire.
Would You Like a Second Opinion on Your Retirement Plan?
80/20 Financial Services is a fiduciary financial planning firm located in Ozark, Missouri, however we can work with you regardless of your location. We specialize in helping cooperative employees plan their retirement. We can show you how to turn your 401k and your R&S lump sum into a stream of income just like when you were working while also helping you achieve your desired financial outcomes in retirement.
Thanks for reading,
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