Bonus lesson - What is a model portfolio?

3 MIN READEditorial Policy

We've covered the basics of your 401(k). In this bonus lesson, we'll dive into some high-level investment concepts. And don't worry, you don't need to be a financial expert to understand them!

What is a model portfolio?

Some providers, like Human Interest, provide employees with a selection of pre-built portfolios (i.e., model portfolios*) that automatically invest your money in a diversified mix of low-cost funds so you don’t have to pick from the tens of thousands of options that are available on the market. 

*Investment advisory services are offered through Human Interest Advisors LLC, a Registered Investment Adviser and subsidiary of Human Interest Inc. An investment advisory fee is paid to Human Interest Advisors (HIA) of 0.01% of plan assets and a separate fee for recordkeeping services and custody-related expenses is paid to Human Interest Inc. (HII) of 0.05% of plan assets. Both fees are deducted on a monthly basis from the employee's account according to the HII and HIA Terms of Service. All prices are exclusive of applicable taxes. If the plan sponsor elects to hire an external investment advisor, the plan sponsor will pay such advisor as agreed between the plan sponsor and advisor. For more information, please see our pricing page.

Let's start with the concept of "risk"

Risk tolerance depends on your personal circumstances and your willingness to weather the ups and downs of the market. As you get closer to retirement, we think it’s wise to be more cautious and have fewer risky investments.

Risk tolerance can help determine your portfolio allocation

Deciding what funds to choose for your 401(k) can depend on various considerations, including risk preference, age, and how much you plan to save for retirement. Broadly speaking, there are two types of risk: systemic risk and asset-specific risk.

  • Systemic risks broadly affect the market and include risks posed by economic downturns, wars, interest rates, and so forth. This is the risk people assume when they invest anywhere in the global financial markets.

  • Asset-specific risk is the risk attributable to what happens within the company, government, or other entity that issues the asset, not the world generally.

For most investors, there’s not much to be done to influence systemic risk. However, diversification* can help mitigate asset-specific risk. Diversifying investments is the practice of investing in assets that may respond differently to market changes. 

*Diversification does not assure a profit or protect against loss. 

What is “acceptable risk”?

Risk tolerance refers to an individual's ability and willingness to tolerate the ups and downs of the market. Determining or choosing an asset allocation should depend on the individual investor’s sense of acceptable risk. This is often determined by both an investor’s general level of comfort with the possibility of losing money in investments and how willing they are to accept that risk given their individual circumstances. 

How Human Interest builds investment lineups

Human Interest focuses on diversification, asset allocation, and low fees when designing investment lineups for retirement plans. We provide a risk questionnaire, which can help you determine your risk tolerance and adjust or choose the appropriate model portfolio allocation for them.

Investing involves risk and may result in loss. Indices are unmanaged; you cannot invest in an index. Past performance does not guarantee future results. This content has been prepared for general informational purposes only and should not be construed as individualized investment advice. Consult an appropriate professional regarding your personal situation before making any investment decision. This content has been prepared for informational purposes only, and should not be construed as tax, legal, or individualized investment advice. Human Interest Advisors LLC does not provide tax or legal advice. Consult an appropriate professional regarding your situation.The views expressed are subject to change. In the event third-party data and/or statistics are used, they have been obtained from sources believed to be reliable; however, we cannot guarantee their accuracy or completeness.

Investment advisory services provided by Human Interest Advisors is limited to Plan investments and such services and/or duties specifically delegated under the terms of service. Read more for additional details.

Claudia Newman manages the Retirement Education team that helps onboard employees to their Human Interest plan and explains the benefits of a 401(k) plan by offering live training. She has been working in the 401(k) and retirement plan industry in several capacities, including relationship management, sales, and back-office support since 2010.

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The (k)ickstart™ program is administered and offered by the recordkeeper, Human Interest Inc. ("HII"). HII's subsidiary and registered investment adviser, Human Interest Advisors ("HIA"), receives a fee based on assets under management. As such, HIA will earn more in asset-based fees if a plan participant increases their contribution in connection with the program.