As an AbbVie executive, there are many ways to prepare for your retirement. One of the most common options is to contribute to the company's 401(k) plan. However, with numerous investment options to choose from, selecting the right funds can be daunting. If you are feeling overwhelmed with the choices, let’s address which choices make sense.
Before you choose any fund to invest in, you need to do two things: understand your risk tolerance and the objective you’re investing for.
Step 1: Understand Your Risk Tolerance
Risk tolerance is the willingness of an investor to lose some of their investment in exchange for the potential for higher returns. Understanding your risk tolerance is crucial when selecting your 401(k) fund(s). You can ascertain a loose understanding of what your risk tolerance might be by using a risk tolerance questionnaire/quiz. AbbVie provides a quiz that helps employees determine their ideal investment approach. You can find the quiz in the "Investment Center" section of your portal. Most of your risk tolerance will be tied to how “risky” you are as a person but also how long away retirement is, and what style of investing resonates with you.
Step 2: Identify Your Investment Objective
Once you understand what risk profile fits you, then you can move onto your investment goals. Ask yourself why you are investing in 401(k) and what you hope to achieve. Your investment objective can vary depending on your lifestyle, age, income, and retirement goals. For many, using the 401(k) is their main source of saving for their retirement income needs. But for others, they are purely using it for the tax-deferral benefits, and the investments inside the account don’t matter. This could be due to other investments outside the 401(k) that have already been put in place for retirement expenses.
Now you know your risk profile and Investment objective, it’s now time to start looking at what fund makes sense for you:
Step 3: All-in-one or build a portfolio?
AbbVie has two all-in-one fund options to choose from – one being BlackRock and the other StateStreet. Using an all-in-one option can be a good choice if you don’t want to build a portfolio or choose one fund over another. These funds are globally diversified in their stock selection and will also provide a bond allocation as well. Both fund families offer Target Date Retirement funds which get more conservative the closer to the date listed on the fund. For example, if it’s 2023 and you choose the 2050 fund, then it will aggressive now. However, as you get closer to the year 2050, the fund will get more conservative so as not to put your investments at undue risk. Whether this is appropriate for you and your situation is to be determined.
If you are wanting to build you own portfolio, AbbVie does have fund choices across all major asset classes and various fund families. Some of these funds will be actively managed, others are passive, and there will also be stable value and money market funds. By not using a target date fund, you can choose an allocation you’d like and change it at any time.
Step 4: Evaluate Fund Performance
Performance records of a fund are critical when choosing between 401(k) fund options. Evaluate how the fund has performed in the last five to ten years and be cautious of funds that do not have this long of a track record. They may not have had enough time to prove themselves and therefore put your money at risk during market changes. While a fund’s longevity isn’t a crucial measure of success, it also you to see how it has performed during various market cycles and (potentially) what you can expect of it in the future.
Step 5: Check Expense Ratio
When it comes to 401(k) mutual funds, you need to check the expense ratio. The expense ratio represents the annual fees for managing a mutual fund. These fees can take a significant bite from your retirement savings. Compare the expense ratios of each fund option you are considering making the most informed decision. Many of the passive and target-date funds in the AbbVie fund line-up are attractively priced, with that being below 0.25% per year. There are several active funds that are above this – they charge more because they are actively trying to beat the market – but if you compare this cost to their respective return, you can determine if that approach is worth it for you. For example, if a passive mid-cap fund charges 0.02% per year to use and has a 5-year average return of 6.9%, and an actively managed mid cap fund costs 0.81% with a 5-year average return of 5.42% - which is the best option? I’m going passive in this case….
Step 6: Should I just invest in AbbVie stock?
Simple answer, no. While there is an option to invest your 401(k) investments into AbbVie stock, this move is wildly risky. Not only is your compensation coming from AbbVie, your LTI plan provides you AbbVie, your benefits are provided by AbbVie, but now you’re looking to invest your long-term investments in the same company? It’s wildly risky. Just read about the people at Enron and see how this can go badly wrong. If AbbVie stock takes off and “goes to the moon”, you’re likely to see your account balance climb quickly, but the risk associated with this is more than most people can handle, and not one I’d recommend.
Step 7: Seek Professional Advice
If the process of choosing between the 401(k) plan options seems challenging, you can seek professional advice. Many advisors can build a 401(k) portfolio for you, but as you’re dealing with all your AbbVie benefits (LTI, DCP, HSA), those investment selections all need to work together. Choosing the same investments across all these programs can cause your portfolio to be lop-sided, overlap, and be a hinderance to your long-term goals. That’s why I have chosen to work with only AbbVie executives so I can focus on their specific needs and company benefits. If this is something you're interested in learning more about, let’s chat.