There was a great 401(k)mutual fund article on Yahoo Finance over the holiday weekend. The article contained 5 Interesting Statistics on How Americans Use Their 401(k)’s.
The first two statistics really caught my attention. I see these same two company 401(k) retirement plan account investment management mistakes made by most of the individual investors I meet with.
First, the average individual company 401(k) retirement plan participant owns about three mutual funds. Three mutual funds are not so hard to keep track of, right? But how do individual company 401(k) retirement plan participants know which mutual funds to own?
I have seen default company 401(k) retirement plan menus offering four mutual fund options to 300 mutual fund options. The more options, the more overwhelmed the individual company 401(k) retirement plan participants become.
There are independent, third-party mutual fund ranking systems available. These rankings include annual costs and investment performance. An experienced and sophisticated investment advice professional can provide a complete analysis of this this information.
The combination of low-cost and best-performing company 401(k) retirement plan mutual funds goes a long way towards building retirement wealth. Far too few of the individual investors I meet with own this combination of company 401(k) mutual fund options.
Second, this article mentions the old nemesis that I find in just about every individual company 401(k) retirement plan account I analyze. That is, the target date mutual fund.
Target date mutual funds provide individual company 401(k) retirement plan participants with the greatest marketing message in the history of financial service firms. That is, “set-it-and-forget-it.” As you get closer to retirement, the mutual fund will own less stocks (more risk) and more bonds (less risk).
What could be wrong with that investment strategy? Plenty. We are currently at all-time stock market highs and near all-time interest rate lows.
Target date mutual funds are most times the most expensive mutual fund option on a company 401(k) retirement plan menu. Not one of the current company 401(k) retirement plan menus that I monitor for my existing clients includes a target date mutual fund ranked in the top three least expensive mutual fund options.
Equally important is the fact that too many target date mutual funds lag in investment performance. Expensive and poor-performing are exactly the company 401(k) retirement plan menu mutual funds you need to avoid.
Individual company 401(k) retirement plan participants are paying too much for too little investment performance. Company 401(k) retirement plan provider marketing messages are largely to blame.
Ric Lager
Lager & Company, Inc.
