Married with two 401(k)s

(Money Magazine) -- Question: What do you think of the concept of "marriage diversification"? If a married couple has 401(k) plans that are managed by the same investment firm, should they each have the same funds in their accounts, or should they pick different, but similarly performing, funds? -- David, Burlington, Mass.

Answer: When I saw the term "marriage diversification," I thought you had something completely different in mind. So I'm glad you explained what you mean by that phrase.

• Email
• Print
• Comment

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

Ultimate Guide to Retirement

• Getting started
• 401(k)s & company plans
• Investing
• Annuities
• IRAs
• Self-employment plans
• Pensions and benefit plans
• Social Security
• Insurance
• Estate planning
• Living in retirement
• Getting help

I agree that, ideally, a husband and wife should collaborate on their retirement planning, including choosing investments. Unfortunately, that doesn't usually happen. A 2009 Fidelity study of more than 500 couples found that only 38% made joint decisions together about retirement finances.

So I applaud you for thinking not just of how you should invest as an individual, but how you and your wife should jointly create a portfolio.

That said, it doesn't necessarily follows that working as a team means you and your wife must stock your 401(k) plans with completely different investments. In fact, I think such an approach could make it more difficult to manage your retirement portfolios.

Besides, depending on how similar the choices in your two plans really are, the ability to fill your respective 401(k)s with different investments may not provide as much of a diversification advantage as you think, if it provides an edge at all.

As I see it, even though you and your wife have two separate 401(k) accounts, you are essentially investing one pool of money that you will both depend on in retirement. So your goal should be to create the best overall portfolio with the entire pot.

Let's say, just for illustration purposes, that you and your wife have decided you should have 25% of your retirement assets in large-cap growth, 25% in large-cap value, 15% in small-cap, 15% in international stocks and 20% in bonds.

To create that mix, I'd say you should research your common menu of investing options and choose what you both consider the best funds in each of those five categories based on such factors as fees, consistency of performance and risk.

Assuming that the investment options you and your wife have are really the same -- that is, same funds, same expenses, same fund portfolios, etc. -- then I'd say you and she should invest the appropriate amount of your respective 401(k) balances in each of those five funds. In other words, you would have the same portfolios.

Now, is it possible that in going over the lineup of investments you find two funds in one category that you have such a hard time choosing between that you feel you must have both? Sure. There's nothing to say that you can't own two or even more funds in one asset class.

But I'd note two things. First, if you do that in every category, you could end up with a large number of funds that may provide difficult to oversee. Even if the relatively simple portfolio above, two funds in each category would give you and your wife a total of 10 funds.

And if you expand, as many people do, into real estate funds, TIPS, high-yield bonds, emerging markets, precious metals, etc. and hedge your bets there too, you could easily end up with more than a dozen funds. So if you really feel you must expand your choices, don't go crazy.

The second point I'd make is that, again, assuming you're dealing with the exact same lineup, you and your wife choosing different funds doesn't really give you any more diversification than you could each achieve on your own in your individual portfolios.

Here's why. Let's say you each have $100,000 to invest in your respective 401(k)s for a total pool of $200,000. Given the allocations above, that would mean you would want to have $50,000, or 25% of that amount, in large-cap growth stocks.

And let's further assume that you and your wife can't decide between the Really Good Large-Cap Growth Fund and the Incredibly Good Large-Cap Growth Fund. So instead of each of you putting $25,000 into one of them for a $50,000 total investment, you decide to split your $50,000 large-cap growth allocation, with you investing $25,000 in Really Good and your wife stashing $25,000 in Incredibly Good.

On the surface, it may seem that having two 401(k)s allows you to diversify more than you could with just one 401(k). But, in fact, you could do the same thing on your own by divvying up the 25% large-cap growth allocation in your portfolio between the two funds, putting $12,500 in Really Good and $12,500 in Incredibly Good.

Doing that would give you $25,000, or 25% of your $100,000 portfolio, in large-cap with two funds. And your wife could do the same in her 401(k), giving her $12,500 in each fund. As a couple, you would then be in the same position as you putting $25,000 into Really Good and her putting $25,000 into Incredibly good.

Either way, you end up with $50,000 in large-cap growth spread between two funds.

The point: if you both have the exact same menu of choices, there's no real advantage from a purely investing point of view to having the two 401(k) accounts as opposed to one.

As long as you view both your 401(k) account balances as one pool of money to be invested holistically and you adhere to allocation targets -- as opposed to just buying whatever strikes your fancy at the time -- then all you're doing is allocating a certain percentage of your overall portfolio to various asset categories and spreading that allocation among different funds.

And as long as you stay within the allocation target for each category -- in this example, 25% in large-cap growth -- then any combination of funds you choose within that category using both your 401(k) accounts, you can also achieve in each of your individual 401(k) accounts. So marriage diversification doesn't give you an investing edge in such a situation. But it can in others.

Let's say that you and your wife have 401(k)s at different employers that are managed by the same investment company offering the same funds, but the otherwise identical funds don't have the same expense levels in each of your plans.

That could easily be the case if one of your 401(k) plans is larger than the other or if one of your employers is better at negotiating lower expenses for its plan. In such a case, after choosing the best funds, you would then want to factor in the differences in fees to build the best overall portfolio.

So, for example, if the small-cap fund in your 401(k) charges 0.75% in annual expenses vs. 1.0% in your wife's plan, while your international fund charges 1.5% vs. 1.25% for hers, then you might want to invest your joint small-cap stake in your small-cap fund and put your overall international allocation in your wife's international fund.

Similarly, if you have different choices altogether in your 401(k)s -- you work for different companies that use different investment firms to manage their plans, a very common situation for couples -- marriage diversification can pay off in that situation too.

For example, if your plan has a particularly good large-cap value fund but the large-cap growth choice isn't so hot, then you and your wife might get your overall large-cap value exposure through your plan and look to your wife's 401(k) for your large-cap growth investing.

In short, to the extent you and your wife actually have truly different investment choices in your plans, the more likely you'll be able to build a better overall portfolio by picking and choosing the best options from each plan.

Bottom line: Marriage diversification may or may not work for you, depending on your specific circumstances. But either way, it's still a good idea for you and your wife to consult each other about investing your 401(k)s and planning your retirement in general.