There was a major headline article posted on the MarketWatch web site yesterday. I linked to it below.
Why your 401(k) is lagging the market’s gains
The article states that average year-end 2014 company 401(k) retirement plan statements are higher than year-end 2013. On first glance, that is great news. The problem comes when you analyze the real numbers.
In 2014 the S&P 500 index rose about 11%. Why is the average company 401(k) retirement plan balance only up 2% over the same period? What gives?
That is not the biggest problem. The most troubling parts of the article are the quotes from the investment advisors.
One advisor blames diversification for the lag in company 401(k) retirement plan investment performance. Wait a minute. I thought that diversification was a good thing. Isn’t that why the majority of investment advisors promote diversification?
If you searched “diversification” in Google, you would find enough articles on the subject to read until you actually reached your retirement date.
Another investment advisor blames the poor 2014 company 401(k) retirement plan investment performance on mutual fund fees. Really? Every company 401(k) retirement plan mutual fund menu that I review includes a low cost S&P 500 index mutual fund. Most retirement plans have several low cost index mutual funds.
How on earth do mutual fund fees explain a 9% gap in 2014 investment performance?
Another advisor blames the 2014 lag in individual company 401(k) retirement plan performance on a familiar nemesis. Market timing is to blame.
He states that the average investor owns their investments an average of only 3.1 years. I would like to remind that advisor of all the financial industry and academic studies on mutual fund portfolio turnover.
The average stock mutual fund turns over 75% to 85% of the stocks they own annually. Mutual fund managers time the stock market on a daily basis. It is a mistake to blame market timing on individual company 401(k) retirement plan mutual fund investors. The real source of market timing is the mutual fund managers.
The article ends with confusing advice on how to manage stock market risk. Some investors may want to lower their stock market risk. Other “long-term” investors maybe don’t have to lower their stock market risk. That decision depends on “your penchant for risk and other factors.”
Diversification was to blame for your lagging 2014 investment returns. The article concludes with the thought that diversification can also help manage your stock market risk.
It is no wonder that individual company 401(k) retirement plan participants are confused. I am confused too. And I advise company 401(k) retirement plan participants for a living.
Ric Lager
Lager & Company, Inc.
