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Employer-sponsored 401(k) plans are one of the most popular ways to save for retirement. But unfortunately, very few
investors realize the full potential of these plans because they neglect to monitor and update their investments as
conditions change.
Instead of taking an active role, most 401(k) investors assume that they can simply choose a fund, set up a contribution
amount, and their retirement will grow on autopilot. However, this is not the case. All plans encourage workers to
update their allocations frequently, but few take the time to do this, and even fewer know how to do this strategically.
Model Investing recommends that you review and adjust your 401(k) allocations on at least a quarterly basis. This
frequency will allow you to successfully adapt to changing financial conditions, taking full advantage of growth
opportunities while also avoiding major losses during severe market downturns. To help you accomplish this, we’ve
developed the 401(k) Allocation Model, otherwise known as the 401 Model.
Find Out How to Use the 401 Model to Manage Your 401K
The 401 Model is designed to keep your retirement funds allocated to the strongest performing areas of the market, while still maintaining adequate diversification. Like all of our investment models, the 401 Model contains a built-in mechanism for moving to a position of safety during severe market declines.
The chart below shows the backtested performance of the 401 Model over the last 23 years. For comparison, the
performance of SPY (an index fund that tracks the performance of the S&P 500), AGG (an index fund that tracks the
Barclays U.S. Aggregate Bond Index), and a 60/40 blend of those two funds are included in the chart. Make sure to read
this entire page to understand how the results below were achieved, and how you can apply these results to your own
portfolio.
Model performance represents total returns and includes reinvestment of dividends and interest. No management
fees or transaction costs are included. Historical performance is not an indication or guarantee of future
performance.
Notice that the 401 Model was able to largely avoid the losses associated with the dot-com collapse and financial
crisis, while also growing significantly faster than portfolios comprised of entirely stocks, bonds, and a 60/40 blend
of stocks and bonds. This outperformance is achieved by dynamically reallocating investments into the top performing
areas of the market as conditions change.
Not only was the 401 Model able to outperform various allocation strategies, as well as the broader market, it did so
with less portfolio volatility and overall risk. The table below contains a series of performance metrics that allow you
to compare the 401 Model against several benchmarks.
| 401 Model Performance Metrics | ||||||||
|---|---|---|---|---|---|---|---|---|
| Strategy | Compound Annual Return | Alpha1 | Beta1 | Standard Deviation | Maximum Drawdown | Sharpe Ratio | Sortino Ratio | Treynor Ratio |
| 401 Model | 10.05% | 6.05% | 0.42 | 11.4% | -22.9% | 0.78 | 1.81 | 0.21 |
| SPY (S&P 500) | 6.95% | 0.00% | 1.00 | 18.3% | -50.8% | 0.38 | 0.43 | 0.07 |
| AGG (Bonds) | 3.85% | N/A | 0.01 | 4.9% | -17.1% | 0.46 | 0.59 | N/A |
| 60/40 Stocks/Bonds | 5.95% | 1.01% | 0.54 | 10.1% | -23.9% | 0.47 | 0.57 | 0.09 |
| Data for 24-Year Period (2000 – 2023) 1 Benchmarked against the S&P 500 |
||||||||
View Full Breakdown of the Performance Metrics Above
Every 401(k) plan contains a different mix of available funds. However, if you look deeper, you’ll notice that there’s a
pattern regarding the types of funds that are offered. In general, most 401(k) plans will offer a variety of stock funds
with domestic exposure, a few stock funds with international exposure, a few bond funds, and typically at least one fund
that is designed for stable value, representing the safety of having your money in cash.
The 401 Model is designed to be adaptable to all 401(k) plans, but will initially require a small amount of effort on
your (or our) part. It is comprised of investable ETFs that relate very closely to funds within your 401(k). The
specific funds are listed below.
| 401 Model Investment Options | |||
|---|---|---|---|
| ETF | Description | Objective | Benchmark |
| Domestic | |||
| SPY | SPDR S&P 500 ETF | Exposure to domestic large-cap companies | S&P 500 |
| IJH | iShares Core S&P Mid-Cap ETF | Exposure to domestic mid-cap companies | S&P MidCap 400 Index |
| IJR | iShares Core S&P Small-Cap ETF | Exposure to domestic small-cap companies | S&P SmallCap 600 Index |
| International | |||
| EFA | iShares MSCI EAFE ETF | Exposure to companies in Europe, Australia, Asia and the Far East | MSCI EAFE Index |
| Fixed Income | |||
| AGG | iShares Core U.S. Aggregate Bond ETF | Exposure to the domestic fixed-income market | Barclays U.S. Aggregate Bond Index |
Your plan should contain at least one fund that closely matches each of the funds listed above. By identifying which
funds in your plan correspond to those in the 401 Model (we cover how to do this in our tutorial,
or we can do
it for you) you’ll be able to implement the 401 Model recommendations inside your specific account.
The first step is to determine which funds in your specific 401(k) plan line up with the funds in our 401
Model. We’re happy to do this for you, free of charge, all we need is a list of the available funds in your
plan. Click the button below to request your free 401(k) matching diagram (select “401(k) Matching Diagram” as
reason for contacting).
Request Your Free 401(k) Matching Diagram
Please note that no target date funds are included in this list because target date funds are not a suitable option
for 401(k) investors. For more information on why investors should stay clear of target date funds, please click here.
The specific 401 Model performance seen above is based on the following criteria and allocations:
| 401 Model Allocations by Rank | |||
|---|---|---|---|
| Fund Rank: | 1 | 2 | 3 |
| Allocation | 50% | 30% | 20% |
The end result is an innovative strategy that achieves steady growth, while protecting 401(k) investors from major
losses associated with market crashes. Regardless of how much you currently have or contribute to your 401(k), the 401
Model can help you achieve better results with fewer scary dips along the way.
The current 401 Model selections and ongoing monthly updates are accessible with a premium subscription. Updated recommendations are
provided on the
first trading day of each month. Sign up today for access to the 401(k) Allocation Model and all of our other
models.
Sign up today for access to the 401k Allocation Model and ALL of our other models!
The 401(k) Allocation Model (401) is our premier Investment Model for 401(k) investors. It’s designed to provide a complete portfolio management solution for people investing through their employer-sponsored 401(k) plans.
The 401 Model dynamically switches between various stock and bond funds to achieve outstanding returns while exposing your portfolio to significantly less risk than traditional investment approaches. Learn More
Anyone who invests through a 401(k) plan will benefit from following the 401(k) Allocation Model. The 401 Model will help you keep your investments in sync with changing market conditions.
The 401 Model is a complete portfolio management solution, designed to manage your entire 401(k) account. If you’re new to Model Investing, consider using it for only a portion of your account to get started. As you become more confident in the 401 Model’s performance, you can begin using it to manage your entire account.
You can view the 401 Model’s historical backtested performance here. Pay special attention to the table of risk metrics, it’s important to understand that the 401 Model’s outperformance does not come as a result of taking on more risk. In fact, the 401 Model exposes your money to significantly less risk than traditional investment approaches.
The 401 Model uses a completely different approach to investing than traditional portfolio management. Instead of splitting your money between stocks and bonds and staying invested regardless of market conditions, the 401 Model tracks the performance of several stock and bond funds and allocates the portfolio accordingly, transitioning between funds as they take turns leading the way higher. Learn More
You can see the latest 401 Model recommendations here. Access requires a premium subscription.
Using the 401 Model is easy, but it’s a bit more complicated than our other Investment Models. The first step is determining which funds in your specific 401(k) plan line up best with the funds in the 401 Model. Don’t worry, you only have to this once, and we can even do it for you! Then, each month you will receive an alert when the latest 401 Model recommendations have been posted. Simply log in to your 401(k) account and make the appropriate changes to your allocations. Learn More
Yes. People are living longer these days and it’s important that your money continues to work for you during retirement. Because the 401 Model has been able to generate higher returns than both stocks and bonds, and also avoid major losses during market crashes, we feel comfortable recommending it to investors of all ages. For more information on how to de-risk your portfolio during retirement, please see this article.
In general, no. Your 401(k) plan should allow you to make changes to your investment allocations free of charge as long as you do not violate your plan’s excessive trading policy. You should research your specific plan’s policy regarding this before beginning to use the 401 Model. Learn More
The 401 Model is able to recognize developing periods of stock market weakness and will typically move the portfolio to bonds during the early stages of a crash. This limits losses and is one of the primary benefits of the 401 Model. When the stock market begins to recover, the 401 Model will move back into stocks.
No. The 401 Model does not use target date funds. Model Investing recommends that all investors avoid using target date funds due to their inherent problems.
